The danger of high growth combined with a large non-cash working capital base: A descriptive analysis

Abstract

A high growth rate may not be the ultimate measure of a successful company. This article shows that growth at too high a rate, for a company with a high non-cash working capital component, may lead to financial difficulties.
While the income statement of a company is based on the accrual of income and expenses, the cash flow statement is based on the receipt and payment of cash. A company experiencing high sales growth, depending on the extent of its non-cash working capital, will find that the cash flow from operating activities before the payment of dividends will not grow as quickly as the net profit after taxation. This is because the accrual part included in the net profit after taxation is also growing at a high rate. At such a growth rate, operating activities do not generate sufficient cash to sustain the day-to-day activities of the company.