The Financing Cash Flow Frenzy: Excessive Borrowing Signs
When companies raise cash not from profits, but from financing activities — borrowings, bond issues, or rights offerings — it’s not always a red flag. But when that financing cash starts to overshadow operating strength, something may be amiss. Welcome to the frenzy.
“Debt is like opium to the poorly governed balance sheet.”
Understanding the Financing Cash Flow Statement
The third section of the cash flow statement often gets the least attention — yet it may hold the clearest signs of a company in distress. Repeated debt issuance, dwindling cash reserves, or dividend payments funded by borrowings are clues that cash is not coming from core operations.
Frenzied Examples from the Financial Archives
| Company | Year | Financing Cash Flow | Red Flag |
|---|---|---|---|
| Evergrande | 2021 | $31.5B inflow | Massive short-term borrowings amid falling sales |
| Jet Airways | 2018 | $1.2B inflow | Debt-funded operations while posting losses |
| Carillion | 2016 | $800M inflow | Dividends paid despite growing debt pile |
Forensic Tool: Debt-to-Operating Cash Flow Ratio
This ratio helps assess how much debt a company has relative to its ability to generate operating cash. A rising trend may signal growing risk.
Formula: Total Debt / Operating Cash Flow
Common Borrowing Red Flags
| Red Flag | What It Looks Like | Reality |
|---|---|---|
| High Financing Inflows | Healthy cash reserves | Funded by debt, not earnings |
| Debt-Funded Dividends | \”Rewarding shareholders\” | Eroding capital base |
| Short-Term Borrowing Spikes | Bridging seasonal gaps | Masking liquidity distress |
Detective’s Note 🕵️
- Look beyond the operating and investing sections. Financing flows hold critical clues.
- Scrutinize if financing inflows are growing faster than revenues or cash from operations.
- Check for dividend payments despite net losses — it’s often borrowed generosity.
- Beware of debt being used as a substitute for performance.
more mysterious financial statements.
“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” – Sherlock Holmes