Analysing and Interpreting Cash Flow Statement

To draw inferences on companys abilitity to generate future cash flow, to repay its borrowings to pay dividends Why did cash balance decrease or increse when company made net profit/loss during period. How were proceeds of equity issue utilised? How much money was borrowed and how was it utilised? How were debentures repaid? How was expantion of plant financed?

Analysing operating activitiy section 1) Analysing quality of earning that company made during a year If net profit add depreciation(non cash item) is equal to cash flow from operation (i.e from net profit and change in current asset and current liabilities in indirect method & cash receipt from customer and payment to suppliers & employees including tax paid in direct method) then companys earning is said to be satisfactory otherwise it is of poor earning quality. Analysing change in current asset and current liabilities Comapare this with difference between begining and ending cash balance Shows areas that need further investigation. Increase in inventory Increse in debtors Decrease in creditors Decrease in inventory Decrease in debtors Increse in creditors Loosened control on inventory Loosened control on collections Accelerating payment to creditors Good control on inventory Good contol on collections Delaying payment to creditors

Squeeze the cash

Accelerate the cash flow

Gives idea about comapnys management of working capital is matter of serious concern or not. Analysing investment activities How was capital expenditure (expantion activity) plant and machinary financed?

From investing or from finacing activity cash flow or from begining cash balance

Analysing financing activities Companys ability to pay interest on debt assessed by ratio of cash flow from operation to inerest payment on debt . if payment covers more than number of times by net cash flow from operations. By this assess, does company have difficulty in meeting its interest obligations. Companys ability to pay dividend assessed by

Dividend is been paid out of cash flow from operation less interest .if money retain after it then that is used to estimate whether company can maintain the rate o0f dividend in future taking current level of cash flow as guide.if suppose certain debenture converted in equity then opligation for divident payment would incresed for maintaining same level of rate of dividend. Identify companys focus with respect to secured borrowing (less risky and carry lower interest rate and unsecured boroorwing (more risky and carry high interest rate). Shows whether company is conservative with respect to taking risk.

Comapny can enjoy high degree of financial flexiblity from following: If companys is having strong financial position that is reflected by Companys ability to raise cash by some investment (substancial amount ) shown in balancesheet without disturbing operation Companys ability to issue additional bebt/equity, considering current debt level in balancesheet Companys ability to avail additional credit from supplier

As a result, the comapanys overall risk is quite low, which means that not only it will survive during a time of unexpected fall in demand resulting in low net cash flow from opearation Can take advantage of a profitable and unexpected investment opportunity.