Cash Flow Statements 2 Flashcards
Evaluation of the cash flow statement should involve an overall assessment of the sources and uses of cash between the three main categories as well as an assessment of the main drivers of cash flow within each category.
For a mature company, it is expected and desirable that operating activities are the primary source of cash flows. If operating cash flow were consistently negative, a company would need to borrow money or issue stock to fund the shortfall. Cash generated from operating activities can be used in either investing or financing activities. If the company has value-creative investment opportunities, it is desirable to use the cash in investing activities. Otherwise, money should be returned to capital providers, which is a financing activity.
Operating cash flow should exceed net income!
Large net income but poor operating cash flow may be a sign of poor earnings quality.
The common-size cash flow statement can be both percentages of total cash inflow or outflow or percentage of net revenue.
What are coverage ratios?
Cash flows from operations divided by the subject of interest such as dividends
How to calculate free cash flow to the firm?
Net Income + Non-Cash Charges (Depreciation etc.) + Interest Expense - Capital Expenditures - Working Capital Expenditures
What is the FCFE?
Free Cash Flow available to the common stockholders
How to calculate the performance ratios:
- Cash flow to revenue
- Cash return on assets
- Cash return on equity
- Cash to income
- Cash flow per share?
CFO / Revenue
CFO / Average total assets
CFO / Average shareholders’ equity
CFO / Operating income
CFO - Preferred Dividends / Number of common outstanding shares
How to calculate the following coverage ratios?;
- Debt coverage
- Interest coverage
- Reinvestment
- Debt payment
- Dividend payment
- Investing and financing
Debt coverage = CFO / Total debt
Interest coverage = (CFO + Interest paid + Taxes paid) / Interest paid
Reinvestment = CFO / Cash paid for long-term assets
Debt payment = CFO / Cash paid for long-term debt payment
Dividend payment = CFO / Dividends paid
Investing and financing = CFO / Cash outflows for investing and financing activities
