Can a Company Have Positive Cash Flow and Negative Net Income?
Cash flow is the net amount of cash and cash equivalents being transacted in and out of a company in a given period. If a company has positive cash flow, the company's liquid assets are increasing. Net income is the profit a company has earned, or the income that's remaining after all expenses have been deducted. Net income is commonly referred to as the bottom line since it sits at the bottom of the income statement.
Yes, there are times when a company can have positive cash flow while reporting negative net income. But first, we'll need to explore how cash flow and net income relate to each other.
- It is possible for a company to have positive cash flow while reporting negative net income.
- If net income is positive, the company is liquid and profitable.
- If a company has positive cash flow, it means the company's liquid assets are increasing.
- A company can post a net loss for a period but receive enough cash from borrowing or other cash inflows to offset the loss and create positive cash flow.
Understanding Net Income and Cash Flow
Net income is calculated by subtracting the costs of doing business, including expenses, taxes, depreciation, and interest on debt from total revenue. If net income is positive, the company is liquid and has a higher probability of paying off its debts, paying dividends to shareholders, and paying its operating expenses.
Cash flow is reported on the cash flow statement, which shows where cash is being received and how cash is being spent. Cash flow is the net amount of cash and cash equivalents being transacted in and out of a company in a given period. If a company has positive cash flow, it means the company's liquid assets are increasing.
Real-World Example of Positive Cash Flow and Negative Net Income
Below is the cash flow statement for JC Penney Inc. (JCP) as of Q2 2018. The company later filed for bankruptcy in the summer of 2020, partly due to its persistent negative cash flow problems.
Looking at the company's filings, net income is carried over from the income statement and is the starting point for calculating cash flow. From the net income amount, cash transactions for the period are either added or subtracted.
- JC Penney had a negative net income (or loss) for the period of $78 million, highlighted in red.
- However, at the bottom of the statement, highlighted in green, the company posted a positive cash position of $181 million.
How can that be?
- We can see, highlighted in blue, that JC Penney received an influx of cash from borrowings of a credit facility along with additional cash from new long-term debt.
- In other words, the company still posted a loss for the period but received enough cash from borrowing to offset the loss and create positive cash flow.
Remember that the cash flow statement only shows a company's cash position. It's not a measure of profitability. A company can still post a loss in its daily operations but have cash available or cash inflows due to various circumstances.
Depreciation is an accounting method that allocates the cost of a fixed asset over its useful life. Depreciation accounts for declines in the value of the asset and spreads the expense of it over the years of the useful life of that asset. Depreciation helps companies avoid taking a huge deduction in the year the asset is purchased, allowing companies to earn revenue from the asset.
Net income is calculated by deducting a company's expenses, and depreciation is one of those expenses. However, since depreciation is an accounting measure, it is not an outlay of cash. As a result, depreciation expense is added back into the cash flow statement when calculating the cash flow of a company.
If a company has a net loss for the period and has a large depreciation expense amount added back into the cash flow statement, the company could record positive cash flow, while simultaneously recording a loss for the period.
Sale of an Asset
If a company sells an asset or a portion of the company to raise capital, the proceeds from the sale would be an addition to cash for the period. As a result, a company could have a net loss while recording positive cash flow from the sale of the asset if the asset's value exceeded the loss for the period.
Accrued expenses occur when a company records an expense for purchasing an asset but does not have to pay for it until the next period. Expenses are recorded at the time they are incurred, not when they are paid. For example, a company might record a substantial expense in Q4 but not have a cash outlay until the next year when the invoice is paid. As a result, the company might post a net loss in Q4 while maintaining a positive cash position.
When analyzing a company's financial statements, it is important to review all aspects of the company's financial position, including net income and cash flow. Only through a comprehensive analysis of all the financial statements can investors make an informed decision.
What Does Negative Net Income Mean?
A negative net income means a company has a loss, and not a profit, over a given accounting period. While a company may have positive sales, its expenses and other costs will have exceeded the amount of money taken in as revenue.
What Are Negative vs. Positive Cash Flows?
Cash flows describe the movement of money and liquid assets on and off a company's books as it makes various transactions. Positive cash flows mean that more money is coming in than going out of a company. Negative cash flows imply the opposite: more money is flowing out than coming in.
What Can Cause Negative Net Income With Positive Cash Flows?
Accounting items like depreciation, capitalized costs, or one-time charges can result in a negative net income even if cash flows were net positive for that period.