Quora Answer: Do You Value Cashflow or Equity More?

The following is my answer to a Quora question: “Do you value cash flow or equity more?”

Cash flow is the net amount of cash that an entity receives, and disburses, during a specific period of time.  For an entity to remain viable, a positive cash flow must be maintained.  Equity is simply the difference between the value of the assets, and the value of the liabilities.

As can be seen, there is no comparison since they refer to entirely different things, although they may correlate.  A business may go through a period of negative cash flow due to a slump in the business, but it has a good net equity because the value of its underlying assets is still good.  This allows it to borrow against it, to alleviate the cash flow problem, but this will lower the equity.  Conversely, a business may have good cash flow, but negative equity because the value of the stock may have declined due to sell off.

You cannot possibly value one over the other because they refer to different parts of the business.  Ideally, you want positive cash flow and good equity.  If one is negative, the business is in trouble.