Relation between capital structure and cashflows - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Relation between capital structure and cashflows

Dec 8, 2009

In the previous article of this series, we had taken a look at one of the components of cash flow statement - cash flow from investing activities. In this article, we shall discuss the last component of the cash flow statement - cash flow from financing activities.

Cash flow from financing activities
As per Account Standard 3 (or AS3), "Financing activities are activities that result in changes in the size and composition of the owners' capital (including preference share capital in the case of a company) and borrowings of the enterprise. "

As you must be aware, a balance sheet is broadly made up of two components. One side shows what a company owns or controls (assets) and the other, what it owes (liabilities plus equity). In accounting terminology, it is termed as 'Application of funds' and 'Sources of funds'. 'Sources of funds' indicate the total value of financing that a company has done. 'Application of funds' displays how a company has utilised these funds.

As such, one can say that 'cash from financing activities' is related to the 'Sources of funds' aspect of the balance sheet. This is where a company reports whether it took in money or paid out money to finance its activities.

Whenever a company changes the size or the structure of its 'Sources of funds', it is recorded under this cash flow head. As such, any increase in debt, be it long term or short term is recorded here. Similarly, transactions relating to repayments are also shown under this head.

Interest costs relating to loans taken form a part of 'cash flow from financing activities' as well. This is because it is considered as the cost of obtaining financial resources or returns on investments.

Moving on, details relating to funds raised by issuance of more shares are recorded here as well. This may include proceeds from issuance of shares though preferential allotments, QIPs, amongst others. It would also include increase in share capital through issuance of ESOPs. Cash transactions relating to repurchase or buyback of shares are shown under this head as well. The cash flow from financing activities also includes outflow of cash in the form of dividends. As dividend can be considered as a cost for obtaining financial services, it is required to be shown here.

Unlike the 'cash flow from operations', a positive cash flow from financing activities would not necessarily be a good thing. A positive cash flow from financing activities indicates that a company has taken on more debt or is diluting equity by issuing more shares. This is not necessarily something that would make an investor happy. Similarly a negative cash flow would not also be harmful as it could mean that a company is paying out dividend (cash outflow).

Let us take up an example to understand this well. Shown below is the 'cash flow from financing activities' portion of Britannia's FY09 cash flow statement.

cash flow from financing activities
Source: Company's FY09 Annual Report; Figures in Rs '000

As you can see, there are some figures which are in brackets. This indicates that the money is going out of the company. On the other hand, the amounts which are not in brackets indicate the inflow of money. It must be noted that the figures in the above image are in Rs '000 (thousand). During FY09, Britannia's cash outflow from financing activities stood at Rs 1.1 bn. This negative cash flow from financing activities is largely due to repayment of unsecured loans (Rs 3.1 bn). However, the company has also received certain funds from borrowings. The net figure however stands at a negative figure of Rs 396 m (Rs 3,063 m - 2,337 m - 330 m), indicating that the amount that was repaid was higher. In addition, due to interest payment and dividend payment (including the dividend tax), the overall net cash flow from financing activities increased to Rs 1.1 bn.

In the next article of this series, we shall look at some of the key ratios relating to cash flow statements.

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


Equitymaster requests your view! Post a comment on "Relation between capital structure and cashflows". Click here!

  

More Views on News

BSE Sensex Surges 1,040 Points; AXIS BANK Among Top Gainers (Market Updates)

May 27, 2020 | Updated on May 27, 2020

The BSE Sensex Surged 1,040 Points; AXIS BANK Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

Mirae Asset Large Cap Fund: Managing Risk through Timely Bets (Outside View)

May 27, 2020

PersonalFN's analysis on the features and performance of Mirae Asset Large Cap Fund.

Mark Mobius Is Looking at India's Swoosh Index and You Should Too (Profit Hunter)

May 27, 2020

The companies that I believe could make up India's Swoosh index.

Make Higher Trading Profits By Not Losing Money (Fast Profits Daily)

May 27, 2020

Making consistent trading profits is hard. What can help you do that is not losing money in the first place.

How to Pick Stocks for Trading podcast (Views On News)

May 26, 2020

The year 2020 has been a difficult one for everybody including traders. You deserve a pat on the back if you have stayed above water in 2020. However, if you haven't done so well then don't worry, I am here to help.

More Views on News

Most Popular

Protect Your Wealth from Fund Managers (Fast Profits Daily)

May 14, 2020

Do you know how much you are paying in fees to your mutual fund? In this video I'll share with you my views.

What the RBI's Rate Cut Means for Options Traders (Fast Profits Daily)

May 25, 2020

The RBI governor has cut the repo rate to 4%. What does this mean for options traders? Find out in this video.

This 'Essential Product' Smallcap is a Must Have for a 'Covid-19' Immune Portfolio (Profit Hunter)

May 19, 2020

This smallcap company needs no stimulus measures to do well in the long term.

Which Stocks Should You Buy, Sell, and Hold in the Market Today? (Profit Hunter)

May 21, 2020

The coronavirus led uncertainty refuses to go away from the markets. Here's what retail investors should do with their stocks...

Why Buffet - and you - should study Quantum Liquid Fund (The Honest Truth)

May 14, 2020

Ajit Dayal on how Quantum Liquid Fund and Warren Buffett have similar investing styles.

More

Get Rich as the
Market Rebounds from Covid-19

Coronavirus Rebound
Get this special guide, authored by Equitymaster's top analysts, now.
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


May 27, 2020 (Close)

MARKET STATS