Analyzing The Components Of Operating Cash Flow: The Charte

A 5-year analysis of the Charter Co., which filed for voluntary bankruptcy in April 1984, illustrates the ways in which operating cash flow information can be used. There was no sudden deterioration in Charter's financial ratios, based on reported earnings, that would indicate bankruptcy, nor did the stock price drop sharply until about 2 weeks before bankruptcy petitions were filed. However, in the reported earnings for 1983, income from continuing operations of $50.4 million was reduced to a loss of $73.1 million when adjusted for nonrecurring and noncash items. Also, cash from operations declined to a use of $90 million. A comparison of the operating cash flows of Charter and a sample of competing oil firms indicated that Charter's ability to alter the timing of cash flows was more constrained. This one-company example seems to support the position that trends in cash provided by operations can be of use in assessing a firm's financial flexibility.