Question

94. What is the conclusion to draw from this data? 2018 Net Increase in Cash& Eq NET CASH FLOW: FINANCING NET CASH FLOW: INVESTING NET CASH FLOW: OPERATION 150,000) (100,000) (50,000)- 0,000 100,000 150,000 200,000 250,000

Answer 1

Answer 94:

Net Cash flow from operations(CFO) is positive indicating that the business is generating good profits & the operations are being run well. The Cash flow from operations shows that the business in its current stage can create positive profits & hence, firm is strong operationally.

The negative cash flow from investment(CFI) is indicative of capital expenditure being done. Now this capex can be of two types:

• Expenditure to increase capacity further to increase cash flow from operations in subsequent periods.
• Capital expenditure can also be done to sustain current level of operations. IF CFI is required to maintain current level of operations, then CFO - CFI is a true picture of periodic value creation. As CFO > CFI, we see periodic value creation in this case as well.

But the negative overall cash flow is a sign of depreciating bank balance of the firm. The balance amount that business is losing, it is being lost in Cash Flow from Financing(CFF). CFF is dependent on the capital structure firm wants to build. CFF can be of two types:

• Debt - In case the high negative CFF is due to debt repayment, then though short term books would have decreasing balance but in the long run, firm would benefit from lower interest payments
• Equity - Negative CFF in this case shows payout in form of dividends. A high dividend payout is justified in case of lots of cash on hand for the business as RoE generation on the larger cash is hard for business to achieve. But if the business is stretched thin & still management gives a huge dividend, then it is a troubling sign.

Answer 95:

Return on Assets(RoA) is a measure of efficiency in use of assets. In this exercise, we can compare the performance of a company over the years and against it's industry on the measure of RoA.

The comparison of 2017 RoA to 2018 RoA shows us that firm has become more efficient in using it's assets and has been able to generate more value from the assets under disposal. To be noted here that we are comparing the measure relatively and not absolutely. Thus, in case the firm disposed of some old assets but didnt see huge decrease in decline. Then as well we may see rise in RoA due to greated revenue generation per unit asset used.

Comparison of 2018 RoA vs Planned RoA (assumed to refer to 2019 expected value) shows that the business is not expected to increase efficiency further this year. On comparing the planned RoA against the industry, we can say that the firm is better than it's peers when it comes to asset utilisation efficiency.

Similarly, comparison RoA against cost of capital shows that value is being created in the process. Value created = Return on capital - Cost of capital

By taking Return on asset as proxy for return on capital, we can see the value creation.

Answer 96:

Return on sales(RoS) is a measure of profitability. It shows the profit generated per money earned during the year.

Rise in 2018 RoS over 2017 RoS, shows the firm was able to create greater profits next year.

Lower 2019 RoS / Planned RoS and the Industry RoS in comparison to 2017 or 2018 RoS shows that the next year is expected to give lower margins in the industry due to some industry level phenomenon. Firm having a higher planned RoS in 2019 than industry is a sign of being able to generate more value than it's peers.