Cash Flow Statement is the most important statement to look for while doing analysis on any Company. I usually read Balance Sheet and Cash Flow Statement as my first important point followed by P&L Statement.
It is better to glance through different sections of a cash flow statement to check if there is an issue with the company. Cash Flow Statement states the inflow and outflow of the cash in a company. Cash is like a petrol which will drive the company smoothly.Without it, a company will face a lot of problems.
Cash is real and it is difficult to manipulate it. On the other hand revenue in P&L Statement can be faked which will increase net profit without effecting Cash Flow Statement. So, it becomes utmost important to study Cash Flow Statement.
Cash Flow Consists of three parts 1)Cash Flow From Operation 2) Cash Flow From Investment 3) Cash Flow From Financing. We will study each and every section of Cash Flow Statement with the help of an example. I will take an example of VST Industries which is Cigarette Manufacturing Company.
Also Read: How To Do Fund Flow Analysis of a Company.
1) Cash Flow From Operation (CFO)
The most important section in Cash Flow Statement. It is the cash generated from the core business operation of the company. It includes cash flow from sales, receiving payment from customers and payment to suppliers and employees.
In Cash Flow From Operation Section, non-cash expenses like depreciation and losses due to non-operating operations like an unrealized loss on an exchange are added and non-operating income like dividends, interest on loans are subtracted to match the numbers.
In above example, the company might have done an investment in its manufacturing section because of which it had a depreciation of about Rs 37 Cr in 2017 and Rs 31 Cr in 2016. As it is a non-cash expense, it gets added to the cash flow statement.
The company made a profit on the sale of investment of about 37 Cr in 2017 and 19 Cr in 2016. Since it is a non-operating income, the amount is subtracted in cash flow statement. Other amounts are very less so we can avoid it.
Trade Receivables is (47 lakh ) for FY 2017. A bracket is used as a negative sign in cash flow statement. A negative sign means Rs 47 lakh is stuck in trade receivables. In FY 2016 it was around 5 cr. A positive sign means a company was able to receive cash from trade receivables. The company managed to generate CFO of around Rs 143 Cr in FY 2017. Rs 47 lakh stuck in receivables out of Rs 143 Cr should not be a concern for a company.
Inventories of a company have improved in FY 2017 from Rs 47 Cr to Rs 11 Cr which was stuck in FY 2016. It is again a good sign of company managing its inventories.
Let’s try and dig more into the annual report to know more about inventories and trade receivables.
See how different section of inventories has worked out in FY 2017 and FY 2016. If you will subtract 377 Cr in FY 2016 with 329 Cr in FY 2017 it comes out to be 47 Cr as calculated in CFO.Rs 47 Cr has flowed into the company in comparison with previous year.
Receivables have also decreased from Rs 12.37 Cr in FY 2016 to Rs 12.04 Cr.If we subtract both the amount it comes out to be 33 lakh which is an inflow of the money. The adjustment in CFO is because of loans&advances and other assets. As I have said Rs 47 lakh stuck in receivables in comparison with Rs 143 Cr of Cash generated from operation is very minimum and should not be a concern.
Money stuck in Trade Payables and Other Liabilities has increased from Rs 35 Cr in FY 2016 to Rs 73 Cr in FY 2017. We will see where the money is stuck in this section.
As we can see the company has in fact done well on Trade Payable front in FY 2017 where it has decreased from Rs 56 Cr to Rs 65 Cr in 2017, while its other current liabilities has also decreased to Rs 192 Cr in FY 2017 from Rs 253 Cr in FY 2016. Overall there is no issue with this section has it has shown improvement.
Overall CFO generated by the company in FY 2017 is Rs 143 Cr which is a good sign. Positive CFO means the company is able to generate cash by doing its core operation. A negative sign means there is an issue and business is not sustainable enough to generate cash by doing its business operation.
An investor should focus a lot on Cash Flow from Operation in Cash Flow Statement. It is the most important section in cash flow statement as far as the investor is concerned.
Also Read: How To Do Operating Analysis of a Company.
2) Cash Flow from investing (CFi)
This section includes the purchase or a sale of property, plants & equipment which is useful for future operations of the company. This section also includes purchase or sale of investments and interest received by the company on loans provided.
Here, the number in the bracket is an outflow of the cash while a positive number is the inflow of the cash.
In case of VST, the company has invested around 42Cr in a purchase of the fixed asset in FY2017. It has also invested around Rs 2348 Cr in buying some investments like mutual funds etc while it has received around Rs 2375 Cr by selling the investments. Other numbers are negligible which can be avoided.
In FY 2017, VST Industries used 15 Cr funds in investing activities.
3) cash flow from financing (cff)
This section includes money received from issue of equity or in form of borrowing from the bank, interest paid on any loan if the company has. Payment of dividend done by the company during the financial year.
In case of VST Industries, the company paid a dividend of around 130 Cr in FY 2017. The company does not have any kind of borrowing which is again a healthy sign.