However, frequent refinancing of debt and an increase in more short-term loans only just to solve liquidity issues will raise red flags from some potential financial distresses. In case the income statement of the company is reading in a good way, its cash flow statement might be differently projected. When great earnings are built on the back of weak or adverse cash flows from operations that is a red flag. That inconsistency may imply that the firm uses aggressive accounting to inflate profits while cash generations lag behind.
Probably the most stable variable in terms of determining the financial condition of the company is operating cash flow because it actually reflects the cash generated by the company from its core business. Although cash flow from a company is always lower than its reported net income, this may indicate that earnings are being manipulated.