If it is overleveraged, a company will take a hit during a credit crunch or a recession. When the interest rates on its debt rose last year, it had to lower its earnings projections. Companies with high returns on capital don't need outside financing to grow. CASH FLOW Cash flow is a term finance types toss around rather casually. And it's defined in different ways.
Analysts often use cash flow as a litmus test for earnings quality.
If earnings are much higher or lower than cash flow, then the stated earnings may be unreliable. Sun's earnings are understated. The company booked a capital-gains tax payment in fiscal 2000, but didn't pay it until 2001. So Oracle's 2001 earnings are overstated. Yet it is critical for fast-growing companies in rapidly changing industries.