Hascol Petroleum

A company's cash flow at any point in time is the difference between its cash available at the
beginning of an accounting period and at the end. The cash includes loan proceeds, investment
income, and the sale of assets, and goes out to pay for operating expenses, direct expenses,
principal debt service, and the purchase of assets such as equipment. When you operate a small
business, cash is king. You can be profitable on paper, but cash poor. If that is your position, you
could be in danger of losing your business.

Statement of Cash Flows

The primary purpose of a statement of cash flows is to provide relevant information about the
cash receipts and cash payments of an enterprise during a period. The statement of cash flows
answers three questions:
1. Where did the cash come from during the period?
2. What was the cash used for during the period?
3. What was the change in the cash balance during the period?
In accomplishing its purpose, the statement focuses attention on three different activities related
to cash flows.
1. Operating activities
It involve the cash effects of transactions that enter into determination of net income.
Net cash from operating activities of ‘Hascol Petroleum’ for the year 2016, 2017 and 2018 are;
2016 2017 2018
2,421,035 1,276,063 (7,819,420)

Depreciation expense reduces profit but does not impact cash flow (it is a non-cash expense).
Hence, it is added back. Similarly, if the starting point profit is above interest and tax in the
income statement, then interest and tax cash flows will need to be deducted if they are to be
treated as operating cash flows.

There is no specific guidance on which profit amount should be used in the reconciliation.
Different companies use operating profit, profit before tax, profit after tax, or net income. 
Clearly, the exact starting point for the reconciliation will determine the exact adjustments made
to get down to an operating cash flow number.

2. Investing activities
It include making and collecting loans and acquiring and disposing of debt and equity
investments and property, plant, and equipment.
Net cash used in investing activities of ‘Hascol Petroleum’ for the year 2016, 2017 and 2018
are;
2016 2017 2018
(2,933,412) (5,824,726) (5,516,647)
Cash Flow from Investing Activities includes the acquisition and disposal of non-current assets
and other investments not included in cash equivalents. Investing cash flows typically include the
cash flows associated with buying or selling property, plant, and equipment (PP&E), other non-
current assets, and other financial assets.
3. Financing activities
It involve liability and owners’ equity items and include (1) obtaining resources from owners and
providing them with a return on their investment and (2) borrowing money from creditors and
repaying the amounts borrowed.
Net cash generated from financing activities of ‘Hascol Petroleum’ for the year 2016, 2017 and
2018 are;
2016 2017 2018
1,785,326 4,846,833 1,518,038
Cash Flow from Financing Activities are activities that result in changes in the size and
composition of the equity capital or borrowings of the entity. Financing cash flows typically
include cash flows associated with borrowing and repaying bank loans, and issuing and buying
back shares. The payment of a dividend is also treated as a financing cash flow.

Statement of Cash Flows

 Cash flows from operating activities……………..           $XXX
Cash flows from investing activities……………..             XXX
Cash flows from financing activities……………..             XXX
Net increase (decrease) in cash………………….             XXX
Cash at beginning of year………………………….             XXX
Cash at end of year………………………………….           $XXX
Direct Method vs Indirect Method of Presentation

There are two methods of producing a statement of cash flows, the direct method, and the
indirect method. In the direct method, all individual instances of cash that is received or paid out
are tallied up and the total is the resulting cash flow. In the indirect method, the accounting line
items such as net income, depreciation, etc. are used to arrive at cash flow.  In financial
modeling, the cash flow statement is always produced via the indirect method.

Indirect method

‘Hascol Petroleum’ uses indirect method in their statement of cash flows. The indirect
method of reporting cash flows is useful for simplifying company’s operational activities to
investors. It can also be used to present investing and financial activities. The main purpose
is to present as easy-to-digest version of the company's financial state that includes net income or
loss and non-cash expenses and activities that led to the current net income.
 ‘Hascol Petroleum’ uses indirect method that should not change the amount of total cash
generated from operations when compared with the direct method. The operating cash flow can
be found by subtracting expenses from the previous net income and adding to the liability
column. The indirect method is preferred by many organizations because it saves time and
resources.

The statement of cash flow’s value is that it helps users evaluate liquidity, solvency, and
financial flexibility.
The information to prepare the statement of cash flows comes from three sources: (a)
comparative balance sheets, (b) the current income statement, and (c) selected transaction
data. Preparation of the statement of cash flows involves the following steps.
1. Determine the cash provided by operations.
2. Determine the cash provided by or used in investing and financing activities.
3. Determine the change (increase or decrease) in cash during the period.
4. Reconcile the change in cash with the beginning and the ending cash balances.
Usefulness of the Statement of Cash Flows
Creditors look for answers to the following questions in the company’s cash flow statement:
1. How successful is the company in generating net cash provided by operating activities?
2. What are the trends in net cash flow provided by operating activities over time?
3. What are the major reasons for the positive or negative net cash provided by operating
activities?
Several financial ratios—including cash reinvestment ratio, and cash flow adequacy ratio—help
business owners focus on cash flow.

Calculating these cash flow ratios for ‘Hascol Petroleum’ can give information about
business's liquidity, solvency, and viability. Add these calculations to Hascol Petroleum cash
flow analysis to strengthen it.
Comparison of Cash Flows and Net Income

Years 2016 2017 2018

Net Income 1,215,626 1,401,248 207,143
Cash Flows 2,421,035 1,276,063 (7,819,420)

Comparison between Income Statement and Cash Flows is understand by the values of their net
incomes. Hascol Petroleum in year 2016 and 2017 have close values of their net cash flows and
net income which means its ‘Earning Quality’ is good. But in 2018 there is a large difference
between the values of net income and net cash flows means in 2018 earning quality of company
is not good

We recognize the function of an income statement is to measure company profitability for a

period. An income statement records revenues when earned and expenses when incurred. No
other statement measures profitability in this manner. Yet an income statement does not show us
the timing of cash inflows and outflows, nor the effect of operations on liquidity and solvency.

Cash flows from operations encompass all earning-related activities of a company. This measure
concerns not only revenues and expenses but also the cash demands of these activities.

Cash flow from operations focuses on the liquidity aspect of operations. It is not a measure of
profitability because it does not include important costs like the use of long-lived assets in
operations nor revenues like the noncash equity in earnings of subsidiaries or nonconsolidated
affiliates.

Impact of Cash Flow on Liquidity

Cash flow statements measure how much money you received and spent over a given accounting
period. The statement looks at three types of income and expenses: loans and other financing,
investments and operations. The statement's bottom line shows the net increase or decrease in
cash for a given period. The net operating cash flow shows whether the company's core business
is bringing in money, as opposed to increasing liquidity by taking out a loan.
‘Hascol Petroleum’ has liquidity if it has plenty of liquid assets, which are cash or assets that
you can convert to cash quickly. If the company's money is tied up in other assets, such as
buildings or equipment you can't sell easily, or you have high expenses, that may leave you with
little cash available. Cash flow statements help you measure your company's liquidity.
As the cash flow decreases liquidity also decreases in return current ratio and quick ratio also
decreases.

Current Ratio = Total current assets / total current liabilities

2016 2017 2018

0.96 0.96 0.87

Current Ratio
0.98

0.96

0.94

0.92

0.9

0.88

0.86

0.84

0.82
2016 2017 2018

Hascol Petroleum, in 2016, the Current Ratio of the company is 0.96 which shows the
company’s ability to meet its short-term liabilities is 0.96 times. This value is so high to be
considered as ideal as the value and Hascol ability to pay off current creditors out of current
assets becomes greater as the ratio becomes higher. In 2017, the Current Ratio of the company
remains the same as compared to the base year 2016 and the company can pay its current
creditors out of current assets. In 2018, the Current Ratio of the company was low as compared
to the base year 2016 which comprises of that the company’s ability to pay its current assets was
decreased. The Current Ratio has minor fluctuations over the time of three years which
represents that ‘Hascol Petroleum’ receives less cash, its value of net cash flow decreases and in
return its liquidity and current ratio decreases.

Quick Ratio = Current assets - Inventory / Current liabilities

2016 2017 2018

 0.49 0.54 0.47

Quick Ratio
0.56

0.54

0.52

0.5

0.48

0.46

0.44

0.42
2016 2017 2018

Hascol Petroleum, in 2016, the Quick Ratio of the company shows the company’s ability to pay
(current assets apart from inventory) is 0.49 times. This value is not so high to be considered as
ideal as the value is too minimal. In 2017, the Quick Ratio of the company is increased to a small
extent as compared to the base year 2016 which shows that the company’s ability to pay its
current assets has also increased. In 2018, the Quick Ratio of the company is decreased by 0.47
as compared to the base year 2016 which shows that the company’s ability to pay its current
assets has decreased. The Quick Ratio of the company has slight fluctuations which show that
over the period of three years’ the company’s ability to pay has not increased to a high extent.
Therefore, the company possesses low liquidity because of its decrease in the cash flows.
However, the company can increase its liquidity by increasing sales to increase its accounts
receivables and by selling and increasing outstanding number of shares.

Impact of Cash Flows on Solvency

Debt to Asset = Total liabilities / Total Assets

2016 2017 2018

0.86 0.82 0.83
 Debt to Asset
0.87
0.86
0.86

0.85

0.84
0.83
0.83
0.82
0.82

0.81

0.8
2016 2017 2018

In ‘Hascol Petroleum’ in 2016, the Debt to Asset Ratio is higher which represents that debt is
0.86 higher than the asset which shows the higher risk for company in bad times. In 2017, the
Debt to asset Ratio for the company is lower as compared to the base year 2016 which represents
that the debt is lower than the asset and therefore, the risk is also the lower and its cash flow also
decreases. In 2018, the Debt to asset Ratio for the company is lower as compared to the base year
2016 which represents the debt 0.83 times lower than its asset & has much decreased than the
asset and the risk has also decreased for the company. The Debt Asset Ratio is higher as
compared to the three years’ analysis of the company. Therefore, in order to decrease the Debt
Asset Ratio, the company should decrease its long-term debt and increase its assets. As a matter
of fact, asset can be increased by increasing revenues and its cash flows, decreasing expenses,
selling and increasing outstanding number of shares so to increase solvency ratio.

Debt to Equity = Total liabilities / Total Equity

2016 2017 2018

7.77 4.67 4.42
 Debt to Equity
9
8
7
6
5
4
3
2
1
0
2016 2017 2018

In 2016, the Debt Equity Ratio is higher which represents that debt is 7.77 higher than the equity
which shows the higher risk for company in bad times. In 2017, the Debt Equity Ratio for the
company is lower as compared to the base year 2016 which represents that the debt is lower than
the equity and therefore, the risk is also the lower and cash flow also decreases. In 2018, the
Debt equity Ratio for the company is lower as compared to the base year 2016 which represents
the debt 4.42 times lower than its equity & has much decreased than the equity and the risk has
also decreased for the company. The Debt Equity Ratio is lower for the last year which means its
net cash flows decreases and because of it solvency ratio also decreases.

Total debt ratio

2016 2017 2018
0.8044 0.7657 0.8456
 Total Debt Ratio
0.86

0.84

0.82

0.8

0.78

0.76

0.74

0.72
2016 2017 2018

Impact of Cash Flows on Profitability

A higher ratio or value is commonly sought-after by most companies, as this usually means the
business is performing well by generating revenues, profits, and cash flow. The ratios are most
useful when they are analyzed in comparison to similar companies or compared to previous
periods. 

Gross profit margin = Net sales - COGS / Net Sales

2016 2017 2018

5.16 4.25 4.40

Profitability Ratios
6

0
2016 2017 2018
Hascol Petroleum in 2016, the Gross Profit Margin of the company is 5.16 which represents
that the Hascol Petroleum making more money on each product throughout the year and it has
higher gross profit margin. In 2017, the Gross Profit Margin of the company decreased as
compared to the base year 2016 which shows that the company’s making less money on each
product. In 2018, the Gross Profit Margin of the company has increased as compared to the base
year 2016 which shows that the company’s making more money on each product has also
increased. The decreasing value of cash flow shows the decrease in profitability and in return
decrease in gross profit margin ratio.

Net Profit Margin = Net Income / Sales

2016 2017 2018

0.47 0.84 0.78

Hascol Petroleum in 2016, the Net Profit Margin of the company is 0.47 % which represents
that the company’s revenue (inclusive of debt) throughout the year is 0.47 % which determines
that the company earns revenue and the company incurred less profit during the year. In 2017,
the Net Profit Margin of the company increased as compared to the base year 2016 which shows
that the company’s revenue (inclusive of debt) increased. In 2018, the Net Profit Margin of the
company has increased as compared to the base year 2016 which shows that the company’s
revenue (inclusive of debt) has also increased. The Net Profit Margin of the Company has been
analyzed for three years’ which shows fluctuations. Therefore, ‘Hascol Petroleum’ should
increase its Net Income by becoming more cost efficient & selling and increasing outstanding
number of shares. As the cash flow decreases the profitability also decreases and and through
this net profit margin ratio also decreases.

Specialized Cash Flow Ratios

Cash Flow Adequacy Ratio

The cash flow adequacy ratio is a measure of a company’s ability to generate sufficient
cash from operations to cover capital expenditures, investments in inventories,
and cash dividends.
 2016 2017 2018
-0.65 -0.20 1.15

A ratio of 1 indicates the company exactly covered these cash needs without a need for external
financing. A ratio below 1 suggests internal cash sources were insufficient to maintain dividends
and current operating growth levels.

In ‘Hascol Petroleum’ the Cash Flow Adequacy Ratio for the year 2016 is -0.56 which is less
than 1. It suggests that Hascol Petroleum internal cash sources were insufficient to maintain
dividends and current operating growth level. This value is not so high to be considered as ideal.
In 2017, the Cash Flow Adequacy Ratio of the company is -0.20 as this ratio is still less than 1
and cannot preferable. In 2018, the Cash Flow Adequacy Ratio of the company is increased by
1.15 as compared to the base year 2016. The Cash Flow Adequacy Ratio of the company has
fluctuations which show that over the period of three years’ the company’s internal cash sources
were insufficient and they are needing cash from external financing to cover their cash needs.

Cash Reinvestment Ratio

The cash reinvestment ratio is a measure of the percentage of investment in assets
representing operating cash retained and reinvested in the company for both replacing
assets and growth in operations.

2016 2017 2018

8.5% 9.2% 10.9%

A reinvestment ratio in the area of 7% to 11% is generally considered satisfactory.

In ‘Hascol Petroleum’ the Cash Reinvestment Ratio for the year 2016 is 8.5% which is greater
than 7%. It suggests that Hascol Petroleum is considering satisfactory. This value is so high to be
considered as ideal. In 2017, the Cash Reinvestment Ratio of the company is 9.2% as this ratio is
greater than 7% and can be preferable. In 2018, the Cash Reinvestment Ratio of the company is
increased by 10.9% as compared to the base year 2016. Cash Reinvestment Ratio of the
company has fluctuations but remain between 7% to 11% which show that over the period of
three years’ the company’s ratio is considered as satisfactory.

Sectorial Analysis of Petroleum Sector

There is a huge difference between the income statement and cash flows of ‘Hascol Petroleum’
and value of sector, which means Earning Quality of sector is not good. The value of net cash
flows and net income statement for the sector closely related to each other which means Earning
Quality of sector is good and preferable. Hascol Petroleum should take steps to improve its
earning qualities.

A current ratio of less than 1 indicates that the company may have problems meeting its short-
term obligations. In Hascol Petroleum current ratio is 0.87 and sector value is 2.9 which means
that company is not meeting its short-term obligations. This indicates poor financial health for a
company but does not necessarily mean they will unable to succeed. Company should meet its
short-term obligations to maintain its current ratio and company should increase its cash flows to
increase its liquidity ratio.

The higher the ratio, of the sector that is 2.9 the more financially secure a company is in the short
term. A common rule of thumb is that companies with a quick ratio of greater than 1.0 are
sufficiently able to meet their short-term liabilities. Hascol Petroleum has quick ratio 0.47 that
is less than 1 so company should pay off its liabilities as early as possible and increase its cash
flows to increase its liquidity.

A lower ratio of Hascol petroleum i.e. 0.83 signals a stable company with a lower proportion

of debt. A higher ratio i.e. 3.3 of a sector means that a higher percentage of the assets can be
claimed by the company's creditors.

A lower margin could indicate a company is underpricing i.e. Hascol has 4.40 gross profit
margin and it is underpricing. A higher gross profit margin indicates that a company can make a
reasonable profit on sales, as long as it keeps overhead costs in control. Sector gross profit
margin is 4.7 i.e. investors tend to pay more for a company with higher gross profit.