Cash Flows Analysis ABDULLAH QAYYUM

Financial Analysis
Abdullah Qayyum
L1F17BSAF0060
SECTION B
Cash Flows Analysis
Definition:
Cash Flow Analysis is the evaluation of a company’s cash inflows and outflows from operations,
financing activities, and investing activities. In other words this is an examination of how the
company is generating its money, where it is coming from, and what it means about the value of
the overall company.
What Does Cash Flow Analysis Mean?

Cash Flow Analysis is a technique used by investors and businesses to determine the value of
overall companies as well as the individual branches of large companies by looking at how much
excess cash they produce. They typically use the Statement of Cash Flows, a document that
shows the actual cash that came in and out of the business during a certain period from investing
activities, financing activities, and operational activities, as well as a few other reports.
The cash flow statement has three sections, following are its components.
 Operations
 Financing
 Investments
Cash Flow from Operations (CFO)

This section records the net income from the income statement. Items included in this
section are accounts receivable, accounts payable, and income taxes payable.
Cash flow from operations is the lifeblood of the business; it proves that positive cash flow can
sustain the company before making any long-term investments, such as buying a new production
plant. We start with the net income and then make adjustments as cash changes hands. For
example, if a supplier pays a receivable, it would be recorded as cash from operations. Changes
in current assets and current liabilities are recorded here in the cash flow from operations.
Cash Flows from Investing Activities

In these cash flows from sales and purchases of long-term assets like property, plant, and
equipment or PPE, we can include things like vehicles, buildings, land, and equipment.
When buying fixed assets like PPE requires a capital expenditure, which is considered a cash
outflow. Included in these transactions are things like buying a new production plant and
investment securities. Cash inflows would flow from the sales of these assets such as fixed
assets, business segments, or whole businesses, and the selling of investment securities.
Of particular interest in this section is the cash outflows for capital expenditures for maintenance,
or purchasing of physical assets that support the continued success of the business.
Cash Flow from Financing Activities

The home of debt and equity transactions is cash flow from financing activities. Here we
will find cash outflows for dividends, share buybacks, and purchases of bonds. We will also see
cash inflows from the sales of stock. Any monies received from taking a loan or any cash the
company used to pay down long-term debt will be recorded here.
Q. What are the different ratios used in cash flows analysis interpret and
explain them in detail.
The cash flow statement is one of the three financial statements a business owner uses in cash
flow analysis. Businesses rely on the statement of cash flows to determine their financial
strength. Cash flow is the driving force behind the operations of a business.
A cash flow analysis uses ratios that focus on the company's cash flow.
Current Liability Coverage Ratio
Sometimes called the current cash debt ratio, this is a measurement of cash from operating
activities to average current liabilities. This ratio demonstrates the ability for operations to
generate cash that can be used to cover debts that need to be paid within a years' time.
The ratio is calculated as follows:
Net Cash from Operating Activities ÷ Average Current Liabilities

Or
Average Current Liabilities=Beginning current liabilities + Ending current liabilities ÷ 2
Price to Cash Flow Ratio
The price to cash flow ratio is an appraisal of a company's share price to its cash flow. This ratio
is generally accepted as being more reliable than the price per earnings ratio, as it is harder for
false internal adjustments to be made.
To calculate the price to cash flow ratio, use this formula:
Share Price ÷ Operating Cash Flow per Share

• OCF = Net Income + Depreciation + Amortization + Change in WC + Any other noncash item
The share price is usually the closing price of the stock on a particular day and operating cash
flow is taken from the statement of cash flows.
Cash Flow Margin Ratio
The cash flow margin ratio is a key ratio for business owners and managers as it expresses the
relationship between cash generated from operations and sales.
Profitability ratios show a company's overall efficiency and performance. These ratios can be
divided into two types: margins and returns.
This ratio is specific in that it indicates the amount of cash generated per dollar of net sales.
The formula is:
Cash Flow from Operating Cash Flows ÷ Net Sales
Cash flow from operating cash comes from the firm's statement of cash flows. Net sales are
taken from the income statement. The larger the percentage, the better the firm is at converting
sales to cash flow.
Cash Flow Coverage Ratio
The cash flow coverage ratio measures the solvency of a company. This is the ability to pay
long-term debts. This measurement gives investors, creditors and other stakeholders a broad
overview of the company’s operating efficiency. Companies with huge cash flow ratios are often
called cash cows, with seemingly endless amounts of cash to do whatever they like.
This ratio is calculated as follows:

Cash Flow from Operations ÷ Total Debt
Or
Cash Flow Coverage Ratio = (EBIT + depreciation + amortization) / Total Debt
Cash flow from operations is taken from the statement of cash flows. Total debt is total
liabilities, both short and long term. This ratio demonstrates the ability of the company to use its
operating cash flows to pay off its debt.
Viability Ratio
The four ratios discussed are methods behind determining a firm's financial viability. Viability is
the ability for a firm to continue generating income to meet all of its financial obligations while
allowing for growth at the same time. Combined, these ratios communicate the effectiveness of a
business' operations and demonstrate solvency (paying off long-term debts) and liquidity (paying
off short-term debts).
Net assets / long-term debt = Viability

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Financial Analysis

What Does Cash Flow Analysis Mean?

Cash Flow from Operations (CFO)

Cash Flows from Investing Activities

Cash Flow from Financing Activities

Current Liability Coverage Ratio

The ratio is calculated as follows:

Net Cash from Operating Activities ÷ Average Current Liabilities

To calculate the price to cash flow ratio, use this formula:

Share Price ÷ Operating Cash Flow per Share

Cash Flow Margin Ratio

The formula is:

Cash Flow from Operating Cash Flows ÷ Net Sales

Cash Flow Coverage Ratio

This ratio is calculated as follows:

Net assets / long-term debt = Viability

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