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Sri Lanka Equity Forum » Stock Market & Forum Help » Analysis of Cash Flow Statement

Analysis of Cash Flow Statement

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1 Analysis of Cash Flow Statement on Sat Aug 27, 2011 5:59 pm

rijayasooriya

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Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
What is CFS?

CFS details the inflow and outflow of cash over a period of time.



What is the importance of CFS over income statement?

Unlike IS, CFS does not include non cash accounting entries such as depreciation.

While accountants use different methods to report income and expenses mainly accrual basis a CFS does not allow any variations in reporting cash balances. Many items that require the use of cash do not appear on an IS.

Ex:-Loan repayments do not appear on IS. So bussiness can show profit and still may have negative cash fiow.



What are the sections of CFS?

1.Operating activities

2.Investing activities

3.Financing activities



How to evaluate the CFS?

1.Operating segment:-

OS tells how much cash the company makes from its products or services - its core bussiness.(Is it making money by doing what it is doing?). This tells whether a company is profitable or not at a glance.

2.Investing segment:-

IS tells how much cash the company makes from investments in its future growth. It shows how much money the company is dedicating to internal investments and improvement and where specifically that money is going.Long term fixed assets will be represented here - building,land,equipment.

3.Financial segment:-

FS details the company's issuing of stocks or bonds.When a company issues stocks the amount of money it makes from this process is entered in this segment. When it buys stocks back that cost shows up as a negative number since the company spends money to do it.



What is the most important number in CFS?

Cash and Cash equivalents number.Appear at the end of statement.Also appear in balance sheet.



Last but not Least

Positive cash flow is the lifeblood of the company.And it is very plus mark for company.But sometimes a company may have negative cash flow because it is investing in new equipment due to rising sales. In long run this is good for the company.So always look what is the reason for negative or positive cash flow.





(Based on articles from www.ehow.com)

2 Re: Analysis of Cash Flow Statement on Sun Aug 28, 2011 2:28 pm

Slstock

avatar
Director - Equity Analytics
Director - Equity Analytics
rijayasooriya wrote:What is CFS?

CFS details the inflow and outflow of cash over a period of time.



What is the importance of CFS over income statement?

Unlike IS, CFS does not include non cash accounting entries such as depreciation.

While accountants use different methods to report income and expenses mainly accrual basis a CFS does not allow any variations in reporting cash balances. Many items that require the use of cash do not appear on an IS.

Ex:-Loan repayments do not appear on IS. So bussiness can show profit and still may have negative cash fiow.



What are the sections of CFS?

1.Operating activities

2.Investing activities

3.Financing activities



How to evaluate the CFS?

1.Operating segment:-

OS tells how much cash the company makes from its products or services - its core bussiness.(Is it making money by doing what it is doing?). This tells whether a company is profitable or not at a glance.

2.Investing segment:-

IS tells how much cash the company makes from investments in its future growth. It shows how much money the company is dedicating to internal investments and improvement and where specifically that money is going.Long term fixed assets will be represented here - building,land,equipment.

3.Financial segment:-

FS details the company's issuing of stocks or bonds.When a company issues stocks the amount of money it makes from this process is entered in this segment. When it buys stocks back that cost shows up as a negative number since the company spends money to do it.



What is the most important number in CFS?

Cash and Cash equivalents number.Appear at the end of statement.Also appear in balance sheet.



Last but not Least

Positive cash flow is the lifeblood of the company.And it is very plus mark for company.But sometimes a company may have negative cash flow because it is investing in new equipment due to rising sales. In long run this is good for the company.So always look what is the reason for negative or positive cash flow.





(Based on articles from www.ehow.com)
Very good and informative.

Pl note : I moved the topic to stock market help as it is more appropriate there

3 Re: Analysis of Cash Flow Statement on Sun Aug 28, 2011 10:10 pm

smallville

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Associate Director - Equity Analytics
Associate Director - Equity Analytics
Something good for new comers.. Thanks.. Wink

4 What Is Cash Flow? on Wed Apr 25, 2012 4:17 am

sriranga

avatar
Co-Admin
How to measure a company's life blood.
The cash flowing in and out of a company is a great indicator of its health. Companies need liquidity to be able to pay their bills and keep their bankers at bay.

But there's a confusing panoply of metrics: cash from operations, free cash flow, cash profits. If cash flow is the life blood of a business, how do you measure a company's blood pressure?

Cash flow statement
The starting point is the cash flow statement. International Accounting Standards require a business to split its cash flows into three categories: those associated with its operations, investing activities and financing activities.

Most commonly, you'll see this in a company's accounts looking something like this (which I've simplified by stripping out and combining lines):




The three categories of operations, investing and financing are clearly separated, and at the bottom there is a reconciliation of the cash flows to opening and closing cash balances.

Alice in Wonderland
The first thing to note is the Alice in Wonderland-like distinction between 'cash generated from operations' and 'net cash generated from operating activities'. "When I use a word, it means just what I choose it to mean," as Humpty Dumpty said in the book.

Cash generated from operations is operating profit with depreciation added back, adjusted for changes in working capital. It is usually reconciled to profit in a note, making it one of the most important notes to look at in a company's accounts. It looks something like this:



Cash generated from operations indicates how much cash a company is making from its basic activities. Depreciation is added back because it's just an accounting entry. Profits with depreciation added back are sometimes called cash profits. Start-up companies that have invested heavily may make cash profits while they are still loss-making, because of high levels of depreciation.

Increases in inventory or receivables are also deducted in calculating cash generated from operations, because these absorb cash. A growing company might be increasing sales, but spending all its cash building up stock.

Interest
Most companies regard interest and tax as integral to their operations, so put them in the first segment of the cash flow. That produces net cash generated from operating activities. It's a mouthful, but a useful subtotal. Not all do: Rolls Royce (LSE: RR), for example, puts interest into the financing category. It also puts the reconciliation of cash to profit on the face of the cash flow statement, so at first sight it looks a very different statement.

Cash conversion refers to how efficiently a company is turning profits into cash. I prefer to measure it by comparing net cash generated from operating activities with operating profit. Remember operating profit has depreciation taken off, so the cash flow figure may be greater. If the ratio is much different from one, it's reason to look more closely.

Investing
The next section of the cash flow statement is more straightforward. Typically, companies invest cash in capital expenditure and acquiring new businesses. If the figures are large, you need to look at how they have been financed: from operations, or from new financing?

Some capital expenditure is necessary just to maintain a company's current activities, rather than to expand. That's usually called maintenance capex. It's an important concept as, long term, a company should generate enough cash from its operations to cover maintenance capex, otherwise it's running its plant into the ground.

The accounting standard encourages, but doesn't require, a company to disclose how much of its capex is maintenance capex. Usually, you can get a decent idea from the narrative in the accounts.
It's a useful number to estimate, and allows you to calculate a figure for an important concept: free cash flow. For our purposes, that's generally defined as net cash flow from operating activities less maintenance capex.

Free cash flow measures the cash that a firm is producing for its shareholders. For that reason it's often used a valuation metric, by calculating price to free cash flow (i.e. market cap divided by free cash flow). But beware, there is a multitude of variants for calculating free cash flow (including those used in discounted cash flow analysis which deduct tax-shielded interest charges).

Financing
The final, financing, segment of the cash flow statement would be clear cut, but for the inclusion of dividends. For most listed companies, dividends are not a discretionary expenditure, at least not without the share price collapsing. So it often makes sense to treat dividends as a fixed charge, like interest and tax.

Probably the easiest way to capture this is to compare net cash generated from operating activities to the dividend, a form of cash dividend cover. If the dividend is not covered, then it is being financed by property sales, lenders, or the shareholders themselves.

In summary
To recap, three useful measures are:
Cash conversion: net cash generated from operating activities ÷operating profit.

Price: free cash flow, where free cash flow = net cash generated from operating activities – maintenance capex.

Cash dividend cover = net cash generated from operating activities ÷ dividends paid.

BY Tony Reading
Published in Investing on 24 April 2012
http://www.fool.co.uk/news/investing/2012/04/24/what-is-cash-flow.aspx

http://sharemarket-srilanka.blogspot.co.uk/

5 Re: Analysis of Cash Flow Statement on Wed Apr 25, 2012 7:31 am

K.Haputantri

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Co-Admin
Thank you Shri for sharing.

6 Re: Analysis of Cash Flow Statement on Wed Apr 25, 2012 1:39 pm

sriranga

avatar
Co-Admin
K.Haputantri wrote:Thank you Shri for sharing.


Thanks for the feed back.
@ Rijaya
I just shared an article from Fool.co.uk, I also read your article in the past.
Good one. Just to refresh our members I shared this one.
If you do not mind, could you please merge this post with your post?

http://sharemarket-srilanka.blogspot.co.uk/

7 Re: Analysis of Cash Flow Statement on Wed Apr 25, 2012 8:11 pm

rijayasooriya

avatar
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
sriranga wrote:
K.Haputantri wrote:Thank you Shri for sharing.


Thanks for the feed back.
@ Rijaya
I just shared an article from Fool.co.uk, I also read your article in the past.
Good one. Just to refresh our members I shared this one.
If you do not mind, could you please merge this post with your post?

It is good that u have posted this article it is more informative. We may keep both articles in this way.....If u want to merge I will merge.

8 Re: Analysis of Cash Flow Statement on Fri Apr 27, 2012 2:49 am

Redbulls

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Director - Equity Analytics
Director - Equity Analytics
Good work and very helpful.
Big thanks to Rijaya and Sriranga.

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