X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
What are cash flows from operations? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Nov 19, 2009

    What are cash flows from operations?

    In the previous article of this series, we took a look at some of the key financial ratios associated with the profit and loss account and the balance sheet. In today's article, we shall take a look at the cash flow statement.

    What is a cash flow statement?

    In simple terms, a cash flow statement indicates how (and how much of) cash has left or entered a company during a particular time period. It helps the investor assess the ability of a company to generate cash.

    Broadly, there are three ways a company can generate and use its cash. This is in fact how a cash flow statement is arranged. The first and most obvious way a company can earn money (or even lose) is through its basic business operations. The second way is through borrowing and repaying loans or by raising capital (through issuing shares and debentures). The third way is by selling or purchasing assets and investments. A cash flow statement is thus typically broken into three parts:

    • Cash flow from operating activities
    • Cash flow from investing activities
    • Cash flow from financing activities

    These three aspects need to be looked at individually as they are all important to a firm. We shall discuss these topics one by one with the help of a few examples.

    Cash flow from operations

    As per Accounting Standard 3 (or AS3), "Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities."

    As the name suggests, this head shows the amount of money the company makes (or loses) through its operations. However, it must be noted that only the "core" operations must be taken into consideration.

    A cash flow statement begins with the profit before tax (PBT) figure. This is because this figure takes into consideration the revenues and expenses related it's a company's operations. This figure also includes depreciation and interest costs. However, PBT should be adjusted for non-cash items (such as depreciation) and financing expenses (such as interest costs), amongst others. The reason depreciation expenses are added back is that there is no actual outgo of cash. It is just an accounting entry that is recorded to recognise the cost of the asset over a period of time.

    After making these adjustments, we arrive at a figure which is termed as the 'operating profit before working capital changes'.

    Working capital is again, a part of the company's core operations. As such, any changes in the same needs to be accounted for. After arriving at the 'operating profit before working capital changes' figure one must account for:

    • The decrease/ (increase) in sundry debtors
    • The decrease/ (increase) in inventories
    • The increase / (decrease) in sundry creditors

    It helps in knowing how a company has unblocked or blocked a certain amount towards meeting its working capital requirements. It does the same by blocking less cash in current assets or by increasing its current liabilities. When the reverse takes place, it means that more money has been blocked in meeting working capital requirements.

    Nestle's CY08 cash flow statement

    Source: Company's CY08 annual report

    Let us take up an example to understand this well. Above, we have displayed Nestle's CY08 cash flow statement. After making the necessary adjustments, Nestle's 'operating profits before working capital changes' stood at Rs 8.7 bn at the end of 2008. However, as we move further down, we can see that the company's 'cash generated from operations' is higher. The difference between the two figures is Rs 550 m (Rs 9258.8 - Rs 8709.5 m). This means that the company was able to improve its working capital position over the year. In fact, it was able to unblock funds to the tune of Rs 550 m during CY08 as compared to the previous year. After we arrive at the 'cash generated from operations figure' we need to deduct the direct taxes.

    In the next article of this series, we shall discuss one of the other two heads - cash flow from investing activities.

    Investing: Back to Basics Article Series - Previous article | Investing: Back to Basics Article Series | Next article

     

     

    Equitymaster requests your view! Post a comment on "What are cash flows from operations?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 01:13 PM

    MARKET STATS