Sec: B

Financial Analysis:

Name: Nabeekh Nayyer

Reg# L1F17BSAF0069

Assignment No: 3

Cash Flows Analysis

Cash Flows Analysis
Cash flow Analysis refers to
the examination or analysis of the
different inflows of the cash to the
company and the outflow of the
cash from the company during
the period under consideration
from the different activities which
include operating activities,
investing activities and financing
activities. This is important because
a company may accrue accounting
revenues but may not actually
receive the cash. It is important for
analyzing the liquidity and long term
solvency of a company.

The cash flow statement

has three distinct sections, which are
broken out into three particular
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.
For those of us who are dividend investors, this section is of importance because we can see
cash dividends paid, and not the net income used to pay for the dividends. That is of concern
because we want a company that can sustain its dividends from operations of the business, as
opposed to taking on more debt.

Different ratios that are used in cash flow analysis

Analyzing the cash flow statement take a look at some ratios that can help us define the cash
flow statement.
 Operating Cash Flow Ratio 
With this ratio, we can determine how many dollars of cash we get from our sales. Unlike
most balance sheet ratios, there is no defined “good” number to be above or below. Typically,
we want a higher ratio than a lower one.
Operating Cash Flow Ratio = Cash Flows From Operations (CFO) / Sales (Revenues)
 Asset Efficiency Ratio
Using this ratio will tell us how a company uses its assets to create cash flow. It is best to use
this ratio over a longer time to get a feel for the use of assets.
We already have our cash flow from operations, so now I will go to the balance sheet for our
total assets.
Asset Efficiency Ratio = Cash Flow from Operations / Total Assets
 Current Liability Coverage Ratio
This ratio tells us about the company’s debt management.
For this ratio, we are going to use our cash flow from operations, as before, but we are going
to subtract dividends paid to give us a more accurate picture of the operating cash flows.
Current Liability Coverage Ratio = ( CFO – Dividends Paid ) / Current Liabilities.
  Long-Term Debt Coverage Ratio
If we are going to measure short-term liabilities, we might as well look at a ratio for the long-
term debt. It is a great practice to split the two liabilities short-term and long-term debt to get
a real sense of what is owed short-term and long-term.
The higher the number, the more cash is required to pay off the debt from operations.
Long-term Debt Coverage Ratio = ( CFO – Dividends ) / Long-term Debt

 Interest Coverage Ratio

The ratio above will tell us the ability of the company to pay its interest payments on its
current debt. A company that is highly leveraged will have a low multiple, and a company
with a superior balance sheet will have a higher multiple. If the interest coverage is less than
one, then the company is running the risk of default.
Interest Coverage Ratio = (Cash from Operations + Interest Paid + Taxes Paid) /
Interest Paid

 Cash Generating Power Ratio

The above ratio is designed to illustrate the company’s ability to create cash solely from
operations when compared to the total cash inflow.
Cash Generating Power Ratio = Cash from Operations / ( CFO + Cash from Investing
Inflows + Cash from Finance Inflows )

Conclusion:
Every company will have its strong points and weak points; our job is to uncover
those in a systematic, rational way. And using a cash flow analysis is a great way to discover
the ability of a company to grow, use, and generate more cash from its operations, financing,
and investments. Cash flow statements show both positive and negative cash flow. While
positive cash flows are healthy, negative cash flow should not raise a red flag automatically.
Further analysis of cash flows over various periods enables an investor to assess a company’s
performance.
This analysis of cash flow statements can reveal many things like the quality of
earnings through comparison of cash from operating activities to company’s net income. For
example, earnings are said to be higher if cash from operating activities is higher than net
income. This statement of cash flow is a significant measure of profitability and present and
future outlook for a company.