Strictly for the intellectuals..cash flow analysis

Hi boarders... This post is created to discuss cash flow analysis to separate cash flow rich from the cash crunch companies. .. don't recommend buying or selling a particular company.. WE WILL DISCUSS VARIOUS WAYS OF CASH FLOW ANALYSIS...

 

How can u separate a cash flow rich companies like page, bosch, fmcgs from others

 

We can compare cash flow from operations to sales and then historical data s available in screener.in ... For example, if the company s maintaining sales to cash flow from operations ratio of 3:1 for past 5 years, suddenly sales revenue got hiked abnormally but not maintaining their historical sales to cash flow from operations ratio then it's sign of dumping their stocks and it never sustain that sales revenue ... IMHO

 

High demand and unique products demands cash and carry only rather than credit ... So if the sales to cash flow from operations ratio s becoming better then it's sign of some competitive advantage arises in market for those ...

Example:
ITC s cigarettes segment never give credit to retailers but for biscuits they are giving credit

 

What about the extra weightage given by the general public to debt /equity ratio.... but why no importance to debt to burden ratio.... I think debt to burden ratio is way important than debt to equity as it accounts for free cash flow ... any counterviews are welcome

 

Now how are we suppose to deal with companies which are good but allow credit buys... how do u keep track about the accounts receivable. ... what if the accounts receivable of this financial years gets converted to cash in next year don't you think it's still good or do u have your reservations about these companies... which other parameters would u look at to assess the quality of these companies

 

Strictly for the intellectuals..cash flow analysis

Excellent concept. I want to learn very much. But pl keep it open for want-to-become intellectuals also like me

 

Anyone can come up with their views on good cash flow analysis... coz as buffett says CASH IS THE KING... its very difficult to twist cash flow statements... so its good to get a hold of cash flow analysis.... everyone has to learn something new at all times.. One of our professors kept asking us are u a better buffalo today than yesterday... so we have to keep asking ourselves ARE WE A BETTER INVESTORS TODAY COMPARED TO YESTERDAY... THE answer will be yes only if we learn daily....so boarders SHOOT YOUR OPINIONS

 

A cash flow statement is a derived statement and throws useful light on the health of the company.

Thankfully, we don't need to derive it these days and it is published along with the other financial data.

Broadly, there are four blocks:

Cash flow from operating activities
Cash flow from financing activities
Cash flow from investing activities
Free cash flow ( or free cash flow to equity)

Cash flow from operating activities tells you if the core business is throwing out cash or is sucking cash. Important to get a sense of the inherent business attractiveness

Cash flow from financing activities tells you if financial activities are sucking cash or throwing cash out. Here elements like interest paid, interest received from investments etc are included.

Cash flow from investing activities tells you if the company is investing or divesting from its core business. This includes cash sucked in ( investments) and cash thrown out ( divestments)

The cash left over after these activities is called free cash flow and over the years it is useful to check if business is adding cash or sucking cash at each level and at an overall level.

Ideally we like stocks where the cash flow from operations is strongly positive, cash flow from financing activities is moderate ( but is not too strongly positive or negative) and cash flow from investments is negative but within reason ( company believes in the business and invests but not too much blindly)

I hope this has not been too macro but this is how I use cash flow statements to help create an ongoing image of firm health.

 

Sirs thanks very much. Can you please give real life example of my favourite stock TCI. I want to buy more and more. If TCI not possible Pl give any other example like JB CHEM OR AJANTA PHARMA.

 

Can some one discuss instances how cash flow statements can be twisted with some examples..

 

One thing we need to understand is what that company s producing because it's the thing which gives cash ... So we should focus on it well ... For example, Eicher motors generating huge cash now ... Why ? Simply because of its royal Enfield .. Still the charm exists among biker, Eicher can generate huge cash ... So rather than looking on numbers ... Why can't we look on the key which unlocks the cash box ?

 

When the trade receivables are higher , it also tells us the competition ... When we produce the unique thing, which has got huge demand , then it results in huge cash flow ...

 

Ajanta Pharma
------------------- in Rs. Cr. -------------------
Mar '15 Mar '14 Mar '13 Mar '12 Mar '11

Net Profit Before Tax 444.88 313.06 163.51 79.75 51.75
Net Cash From Operating Activities 262.92 189.71 207.22 44.97 112.27
Net Cash (used in)/from
Investing Activities -145.63 -175.57 -100.01 -41.64 -39.33
Net Cash (used in)/from
Financing Activities -101.18 -19.80 -95.90 -2.92 -65.63
Net (decrease)/increase In Cash
and Cash Equivalents 16.11 -5.66 11.31 0.40 7.30

Opening Cash & Cash Equivalents 7.30 12.96 1.65 1.38 5.23
Closing Cash & Cash Equivalents 23.41 7.30 12.96 1.78 12.54


1. The first thing you see is that while there is a linear growth in net profits from march 11 to march 15, the story of net cash from operating activities has been irregular. This is a sign to go and look at the P&L deeper as to why this is the case.

2. Net cash from investing is growing steadily in the negative but this means the firm Is investing and regularly. This is a good sign.

3.Net cash used in financing activities is growing steadily. One guess, without looking t the P&l is that their interest costs are increasing. Then you will need to understand if this is true or if there are other reasons by looking at the other financials

4. Fact is as of March 15, its pile of cash was the largest in the last five years You could be satisfied with this or ask yourself why is this such an irregular pattern.

 

Pharma company such as torrent pharma got exclusivity from usfda for arpiprazole drug ... It's generating huge cash now ... Whether they can do the same magical cash flow on next year too ?... It depends on so many factors such as ANDA approvals etc..

 

stockjeet - It is important to analyse two things well. Of course it is important to understand what the company produces, how efficiently and all that. The cash flow statement tells you about the strength of the inherent business ( cashflow from operating activities) but it also tells you how the company manages its finances and what outlook and attitude the company has to future potential ( investments being the proxy for that )

 

Yeah it's important to analyse in all aspects ... Then only we can conclude

 

Thank you sir for the live example of Ajanta Pharma. It becomes easier to understand. I will study with APs annual accounts in hand. I will also do the analysis of stocks this way.

 

Aripiprazole is an atypical antipsychotic used to treat bipolar disorder. .. and that too as an add on therapy to a typical antipsychotic like olanzapine... so I will not get too excited about a molecule like aripiprazole. .. just added as a part of continued discussion

 

Hi suppose a company has decent operations cash but due to investing and financing overall cash flow is still negative and also if a company has significant a account receivable. ..what would you advice a novice investor should do.. should he look at some other parameters and hold on to the company or exit it???