How can I measure the company’s cash flow statements?

C.I October 27, 2024

How can I measure the company’s cash flow statements?


CASH FLOW STATEMENT:  The cash flow statement is a financial document that provides aggregate data regarding a company's cash inflows and outflows. It bridges the Income Statement and Balance Sheet by showing how cash moves out and into the Business.



 

Measuring a company's cash flow statement involves analyzing its inflows and outflows of cash and cash equivalents. Here's a step-by-step guide:

 

 

Cash Flow Statement Structure:

1. Operating Activities

2. Investing Activities

3. Financing Activities

 

Key Metrics:

1. Operating Cash Flow (OCF)

2. Free Cash Flow (FCF)

3. Cash Conversion Cycle (CCC)

4. Cash Flow Margin

5. Debt Service Coverage Ratio (DSCR)

 

Operating Activities:

1. Cash Received from Customers

2. Cash Paid to Suppliers

3. Cash Paid for Operating Expenses

4. Operating Cash Flow (OCF)

 

Investing Activities:

1. Purchase of Property, Plant, and Equipment (PP&E)

2. Sale of PP&E

3. Investments in Securities

4. Acquisitions/Divestitures

 

Financing Activities:

1. Debt Issuance/Repayment

2. Equity Issuance/Repurchase

3. Dividend Payments

 

Analysis Steps:

1. Evaluate OCF: Is it positive? Increasing?

2. Calculate FCF: OCF - Capital Expenditures

3. Assess CCC: Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding

4. Calculate Cash Flow Margin: OCF / Revenue

5. Review DSCR: OCF / Debt Service

 

Red Flags:

1. Negative OCF

2. Decreasing FCF

3. Increasing CCC

4. Low Cash Flow Margin

5. High Debt Service Ratio

 

Best Practices:

1. Compare with industry averages

2. Analyse trends over time

3. Consider accounting policies (e.g., depreciation)

4. Review management's discussion and analysis (MD&A)

5. Use financial databases for benchmarking

 

Tools and Resources:

1. Financial databases (e.g., Bloomberg, Thomson Reuters)

2. Company website (annual reports, investor presentations)

3. EDGAR (SEC) for US-listed companies

4. Financial analysis software (e.g., Excel, Financial Modelling)

 

Example:

Suppose you're evaluating Company X's cash flow statement:

- OCF: $100M (positive)

- FCF: $50M (decreasing)

- CCC: 60 days (increasing)

- Cash Flow Margin: 10% (low)

- DSCR: 1.2 (healthy)

 

**Based on these metrics, Company X's cash flow statement raises some concerns, such as decreasing FCF and increasing CCC.


Our Opinion:

By following this guide, you'll gain a comprehensive understanding of a company's cash flow statement and be able to identify potential strengths, weaknesses, and areas for improvement.


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