Analyzing Cash Flow Flashcards
Three Questions to Determine Quality of Cash Flow
What is the source of cash flow and its affect on margins?
Can it Be Sustained and Repeated?
To what degree does cash flow represent long-term earning power and economic viability
What is the source of Cash Flow and its affect on Margins of protection
Cash that increases net worth has a high quality.
Cash flow that increases leverage has a low quality.
To What Degree can the cash low be sustained or repeated in future periods
Cash from a one time improvement in current assets turnover is of lower quality than cash flow from sustainable profits
Improvement in current asset turnover may be misleading if the reason is an inventory write off
Cash flow from sale of equity is of lower quality b/c may not be repeatable
Cash flow from sale of equity is lower that operating cash flow b/c may not be repeatable and eliminates use of asset
To What Degree can cash flow represent long-term earning power and economic viability
Cash flow from real and repeatable profit is of higher quality than debt or increased trade payables
Cash flow from profit is of higher quality than cash flow from weak customers
Cash flow from sale of long-term asset is of lower quality than cash flow from additional equity investments.
The Second Most Desirable Cash Flow
Improvements in Asset Efficiency and additional Equity Investments
Least Desirable Cash Flow
Additional Debt or Sale of a Long-Term Assets
Test Cash Flow Origins from Real and sustainable profits by taking two steps.
- Look at Account Quality Analysis
2. Estimate portion of cash flow provided by operating profit.
Demands on Cash Flow
Working Capital to Support Sales Growth
Additional Working Capital to Support Decline in asset efficiency
Fixed Capital Expenditures and Acquisitions of Assets
Dividends and repayment of stockholder loans
Required principal debt service
