financial analysis lecture 2 cash flow statement and cash flow analysis
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CF Statement
Helps assess a company’ s
historical ability to generate cash
that can be invested in additional
assets or distributed to its capital
providers
CF Statement
Company’ s cash receipts and
cash payments during an
accounting period, showing how
these cash flows link the ending
cash balance to the beginning
balance shown in the company’ s
balance sheet
CF Statement
The cash-based information in CF
statement contrasts with the
accrual-based information from the
income statement
CF Statement
A reconciliation between reported
income and Cash Flows from
operating activities provides info:
when, where, and how company is
able to generate cash from its
operation
CF Statement
- Does the company generate enough cash
from its operations to pay for its new
investments, or relying on new debt to
finance them?
- Does the Company pay dividends to
common stockholders using cash generated
from operations, from selling assets, or
from issuing debt?
CF Statement
Classifies all cash flows as being
provided by (or used for):
- Operating
- Investing, or
- Financing activities
(IFRS, IAS Nr.7, U.S.GAAP FAS Nr.95)
CF Statement
Operating activities: •Company’s day-to-day activities that create
revenues (selling inventory, providing services)
•Cash inflows: sales, collection of accounts
receivable
•Cash outflows: cash payment for inventory,
salaries, taxes, other operating expenses, paying
to account payable
CF Statement
Investing activities: •Purchasing and selling investments (property,
plant, equipment, intangible assets, other long-
term assets, long-term and short-term
investments in equity and debt issued by other
companies (not cash equivalents and not dealing
and trading securities).
•Cash inflows: sale of long-term assets
•Cash outflows: payment for purchase of long-
term assets
CF Statement
Financing activities: •Obtaining or repaying capital (equity or long-
term debt). 2 primary sources: shareholders and
creditors
•Cash inflows: cash receipts from issuing stock
or bonds, from borrowing
•Cash outflows: payments to repurchase stock,
pay dividends, repay bonds and other
borrowings.
•NOTE: Account payable = operation activities
CF Statement:
difference between IFRS and GAAP
CF classification IFRS GAAP
% received Operating or Investing Operating
% paid Operating or Financing Operating
Dividends received Operating or Investing Operating
Dividends paid Operating or Financing Financing
Bank overdrafts = part of cash equivalents Financing
Taxes paid Operating (part may be
Investing or Financing)
Operating
CF Statement
Indirect:
How cash flow from operations can
be obtained from reported net
income as the result of a series of
adjustments (non-cash, non-
operating)
CF Statement
Direct:
specific cash inflows and outflows
that result in reported cash flow
from operating activities.
Eliminates any impact of accruals
CF Statement
IFRS: Direct or Indirect, Direct is encouraged
(Tax cash flows must be separately
disclosed in SF statement)
CF Statement
GAAP: Direct or Indirect, Direct is encouraged.
If Direct – a reconciliation of net
income and operating cash flow must
also be provided.
Interest and taxes paid must be
disclosed in footnotes if not presented
on the CF statement
CF Statement Analysis
Useful information for
understanding a company’s
business and earnings and for
predicting its future cash flows
Evaluation of the sources and uses of cash
-Evaluate where the major sources
and uses of CF are between
operating, investing, and financing
activities
-Evaluate the primary determinants
of operating, investing, and
financing CFs
Evaluation of the sources and uses of cash
-Major sources of cash vary with
company’ s stage of growth:
-Mature company: over long term
should generate cash from its
operating activities
-New or growing company:
operating CF may be negative for
some period of time
-CF is used for investments
Free Cash Flow
-Operating CFs should be sufficient
to cover Capital expenditures
-Free cash flow – excess of
operating cash flow over capital
expenditures
Free Cash Flow to the firm
FCFF = NI+NCC+Int(1-Tax rate)-
FCInv - WCInv
Where:
NI = net income
NCC = Non-cash charges (D&A)
Int = interest expense
FCInv = capital expenditures (FA)
WCInv = working capital expenditures
Free Cash Flow to the firm
FCFF = CFO+Int(1-Tax rate)-
FCInv
Where:
CFO = Cash flow from operating activities
Int = interest expense
FCInv = capital expenditures (FA)
Free Cash Flow to Equity
FCFE = CFO-FCInv + Net
borrowing – Net debt repayment
Where:
CFO = Cash flow from operating activities
FCInv = capital expenditures (FA)
Cash Flow Ratios: performance
CFO/ Net revenues = cash generated per 1 USD of revenues
CFO/ Average total assets = cash generated from all
resources
CFO/ Average Equity= cash generated from owner resources
CFO/ Operating Income =cash-generating ability of
operations
(CFO – Preferred dividends)/number of
shares= operating cash flow on a per-share basis
Cash Flow Ratios: coverage
CFO/ Total debt = financial risk and financial leverage
(CFO+ Interest paid +Taxes paid)/ Interest paid
= ability to meet interest obligations
CFO/ Cash paid for long-term assets= ability to acquire
assets with operating cash flows
CFO/ Cash paid for long-term debt repayment
=ability to pay debts with operating cash flows
CFO/ Dividends paid= ability to pay dividends with operating cash
flows
CFO/ Cash outflows for investing and
financing activities = ability to acquire assets, pay debts and make
distributions to owners
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