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Financial Analysis Recapitulation of 18.10.2016
IV. Understanding the Cashflow Statement
FREE CASH FLOW
FCF to the Firm
FCF to Equity
CASH FLOW RATIOS
Cash Flow Performance
Cash Flow Solvency
FREE CASH FLOW: Is the cash generated by the operating activities after spending money on the investments needed for the business continuation.
2 Types of FCF (S):
FCFF = Net Income + Non-Cash Charges + interest x (1 - tax rate) - Capital expenditure - Investments in working capital
FCFF = CFO + Interest(1-Tax rate) – FCInv
FCFE = CFO – FCInv + Net borrowing – Net debt repayment
Cash Flow Ratios:
Cash Flow performance - Profitability Cash Flow coverage - Solvency
What It Measures
Cash flow to revenue
CFO / Net revenue
Cash generated per euro of revenue
Cash return on assets
CFO / Average total assets
Cash generated from all resources
Cash return on equity
CFO / Average shareholder's equity
Cash generated from owner resources
Cash to income
CFO / Operating income
Cash-generating ability of operations
Cash flow per share
(CFO - Preferred dividends) / Number of common shares outstanding
Operating cash flow on a per-share basis
CFO / Total debt
Financial risk and financial leverage
(CFO + Interest paid + Taxes paid) / Interest paid
Ability to meet interest obligations
CFO / Cash paid for long-term assets
Ability to acquire assets with operating cash flows
CFO / Cash paid for long-term debt repayment
Ability to pay debts with operating cash flows
CFO / Dividends paid
Ability to pay dividends with operating cash flows
Investing and financing
CFO / Cash outflows for investing and financing activities
Ability to acquire assets, pay debts, and make distributions to owners
A Cash Flow Analysis of Comparables:
Andrew Potter is comparing the cash-flow-generating ability of Dell with that of several other computer manufacturers: HP, GTW, and Apple. He collects the following information:
Question: What is Potter likely to conclude about the relative cash-flow-generating ability of these companies?
Operating Cash Flow
Average total assets
Dell has consistently generated operating cash flow relative to both revenue and assets.
HP also has a good level of operating cash flow relative to revenue, but its operating cash flow is not as strong as Dell relative to Assets.
GTW has poor operating cash flow on both measures.
Apple has dramatically improved its operating cash flow over the three years and in 2005 had the strongest operating cash flow of the group.