IAmNeil

bchadwick Wrote:
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> Well, it obviously means that there isn't enough
> OCF to cover current liabilities.
>
> Generally,price-type ratios don't make sense when
> the denominators are negative, but taking the
> reciprocal and expressing them as yields can be
> useful, because you don't get a discontinuity at
> zero.
>
> This ratio has OCF in the numerator, so the OCF
> ratio can handle a negative number without much
> trouble. It indicates the % shortfall in covering
> current liabilities and indicates how much of the
> liability will have to be financed through other
> methods (selling assets, raising new capital,
> deploying excess cash, etc.).

This.

Also, I would add that negative OCF over a short-term period isn't necessarily a huge red flag (although it may move the stock in some cases). If the company has a history of burning cash, that obviously could be very bad. Just because OCF is less than liabilities for a while doesn't really mean anything though (case by case).

The Street tends to focus too much on short-term numbers, and sometimes there are buying opportunities when a company is temporarily consuming cash to ramp some opportunity (through higher costs / depressed profitability, for example). Of course, you have to be careful that the ramp is grounded in reality and is not overly aggressive "dream work" stuff by management.

A lot of aspirational start up companies that have no chance of succeeding will burn cash and continually issue new shares to meet liabilities, which is usually a very dangerous profile for longs. I was short HEV at $6.00 (now $0.35) on this premise.