.svg)
.svg)
.svg)
If the company has a net operating profits of 30millions and the operating cash flow statement is 10 millions . The quality of operating profits = operating cash flow ratio / operating profits .
We notice that the ratio of operating cash flows to net profits = 3:1 , meaning that the company had only one pound from every 3 pounds of the operating profits. It is common that the operating profits are more than the net operating cash flow statements .
There shouldn’t be a great difference between the two numbers . However it differs according to each industry and its competitiveness and effect on earnings and operating cash flow . The company has to do its best to get the number of operating cash flow close to that of net operating profits through increasing receipts largely and decreasing payments in order not to affect the company efficiency and reputation .A big difference is a negative indicator of financial mismanagement in the company that may lead to financial failure later . No doubt that the company should attain a big amount of gains , but a profit number without new cash will have a bad effect on the company .
Indicators of profits quality in the cash flow statement
How enough is the net operating cash flow statement to pay the current liabilities of the company
= net operating cash flow / current liabilities
For example if the net operating cash flow for the current period is 15 millions and the current liabilities for the next period is 30 millions . So the ratio is 50%
This means that the company faces a problem in paying its liabilities, especially if their payment dates are close . Consequently the company has to speed up the receipts and try to accommodate the cash it has and the date of its current liabilities for the next periods because paying them depends on the net cash flow from operating activities .
The free cash flow statement
This is a concept used in financial analysis . It is that the free cash flow statement measures the cash available in the company to afford payments , after paying all required cash .
In addition ,the free cash flow statement measures the available cash for lenders and owners after paying all liabilities of investment expenditures ( buying fixed assets )
free cash flow = operating cash flows - investment expenditures
an example of operating cash flow of El-Salaam Company . It includes interest payments of 1200 millions and the net investing cash flow is 5500 million cash outflow .
First , we calculate the adjusted operating cash flow statement
= 17 millions + 1200 millions = 18200 millions
Free cash flow =
18200-5500= 12710
Another definition of free cash flow is
Operating cash flow
1- Net capital expenditures
2- Distribution of common stock profits .
What are the indicators of liquidity quality ?
1 -Required cash flow indicator
Net cash flow from operating activities / debts payable ( rental payments )
This indicator shows the ability of operating cash flow statements in the company to pay for the required debts and regular liabilities of the company ,such as suppliers , creditors and rentals .
2-Cash coverage indicator
Net cash flow statement from operating activities / financing and investing cash outflow
This indicator shows the ability of the company operating activity to pay for the financing and investing liabilities .
3 – Paid interests indicator
Paid interests / net cash flow from operating activities
This indicator clarifies the paid interests ratio to the net cash flow from operating activities and measures the company ability to pay the liabilities and interests of credit in the future .
Analysis of cash flow statement from investing activities
A big positive net investing cash flow (in comparison with other periods ) means that the company got rid of fixed assets which causes a decrease in productivity of the company . It also may cause the company gradual liquidation . Furthermore if the company got rid of financial investments , this will lead to prevention from future interests.On the contrary in the case of negative cash flow which indicates the company enlargement in investments expenditure and financial investments . It may lead to an increase in production , interests and profits of the company investments in the future .
Moreover the ratio of payments for buying fixed assets and investments should be analyzed and compared to the previous periods .
The analysis of cash flow statement from financing activities
The cash flow statement from financing activities clarifies the different financing types of the company over the year . Is it equity financing ( common stock ) or debit financing ( bonds and loans )? What is the amount of received cash ? Has the company paid the loans ( short term facilities and the long term loans )
Consequently we analyze the cash inflow from financing activities received in cash or via stock issuing .
Non-cash transactions :
On preparing the cash flow statement , non-cash transactions aren’t considered because they have no effect on the movement of cash . They are the transactions related to the items in the cash flow statement but they don’t affect the movement of cash.
To transfer the company debts into common stock , in other words if you have dues for a supplier , you can give him a stock and reduce the dues for suppliers or that paying for the supplier was through a shareholders ‘ current account . When you calculate the change in the suppliers’ balance, you have to consider that there is a decrease in the suppliers’ balance resulting from a non-cash transaction .
Decreasing the clients’ debit balance through decreasing the shareholders’ current account means that the matured debit for a client ,the received amount is deposited in shareholders’ current account . The increase of fixed assets value of the company is not by buying in cash but by the company having the fixed assets through long term liabilities or through financing rent or common stock issuing or stock exchange .
The issue of common stocks is included in financing activities but the common stock issuing to pay for the liabilities of loans is a non-cash transaction .