Reading 31
MODULE 31.1: ANALYZING STATEMENTS OF CASH FLOWS II
Analyze and interpret both reported and common-size cash flow statements.
The cash flow statement helps assess liquidity, solvency, and financial flexibility. An analyst uses it to determine:
- Whether regular operations generate enough cash to sustain the business
- Whether enough cash is generated to pay off existing debts as they mature
- Whether the firm is likely to need additional financing
- Whether unexpected obligations can be met
- Whether the firm can take advantage of new business opportunities
Cash flow analysis begins by evaluating sources and uses of cash across operating, investing, and financing activities. Patterns change with the firm's life cycle:
- Early-stage growth firms may have negative CFO as they build inventory and receivables, financed externally via debt/equity issuance. This is not sustainable — eventually firms must generate positive CFO to keep external investors.
- Successful firms long-term must generate CFO > capital expenditures and provide a return to debt and equity holders.
Look at how CFO is generated. Earnings-related activities should drive CFO. Short-term CFO can be boosted by liquidating inventory/receivables or stretching payables — not sustainable (inventories can't go below zero; suppliers won't extend credit indefinitely).
CFO checks earnings quality. Stable CFO/NI relationship indicates quality earnings; earnings significantly exceeding CFO may signal aggressive accounting (early revenue recognition, delayed expenses). Examine variability of NI and CFO as a risk indicator.
Investing activities: rising capex usually means growth; falling/asset sales may indicate cost-saving but raises questions about future replacement needs. Acquisitions and securities investments also appear here.
Financing activities: reveals whether the firm is raising debt/equity or repaying/redeeming/paying dividends. Red flag: issuing debt to repurchase stock or pay dividends.
Common-Size Cash Flow Statements
Two approaches:
- Express each line item as a percentage of revenue — useful for trend and forecasting (once revenue is forecast, tie-rev items can be estimated).
- Express each inflow as % of total inflows; each outflow as % of total outflows.
| (% of Revenue) | 20X9 | 20X8 | 20X7 |
|---|---|---|---|
| Net income | 13.4% | 13.4% | 13.5% |
| Depreciation | 4.0% | 3.9% | 3.9% |
| ΔAccounts receivable | −0.6% | −0.6% | −0.5% |
| ΔInventory | −10.3% | −9.2% | −8.8% |
| ΔPrepaid expenses | 0.2% | −0.2% | 0.1% |
| ΔAccrued liabilities | 5.5% | 5.5% | 5.6% |
| Operating cash flow | 12.2% | 12.8% | 13.8% |
| Cash from sale of fixed assets | 0.7% | 0.7% | 0.7% |
| Purchase of plant and equipment | −12.3% | −12.0% | −11.7% |
| Investing cash flow | −11.6% | −11.3% | −11.0% |
| Sale of bonds | 2.6% | 2.5% | 2.6% |
| Cash dividends | −2.1% | −2.1% | −2.1% |
| Financing cash flow | 0.5% | 0.4% | 0.5% |
| Total cash flow | 1.1% | 1.9% | 3.3% |
Interpretation: CFO/revenue has declined, largely due to accumulating inventories. PP&E purchases are also taking up an increasing share of revenue. Consistent with a growing firm — but an analyst should ask whether the inventory build is intended or unintended.
CFS 用來看：日常營運是否足以維持、是否能還債、是否需融資、能否應付突發、能否抓機會。
CFO 看公司生命週期：早期可能負 CFO（建存貨／應收），靠融資但不可持續。長期須 CFO > 資本支出，並回饋債權人與股東。
CFO 來源要分辨：本業帶動 vs 靠減存貨／拖供應商（不可持續）。CFO/NI 穩定＝盈餘品質好；NI 遠大於 CFO 警惕激進會計。
投資活動：資本支出↑＝成長；下降或變賣資產要問是否未來會痛。融資活動：發債回購股票或付股利的紅燈。
共同尺寸 CFS：(1) 各項 / 營收；(2) 各流入 / 總流入、各流出 / 總流出。例 Triple Y：CFO/Rev 從 13.8%→12.2% 降，主因存貨堆積；PP&E 支出佔比也上升——疑似成長但需確認是否為刻意。
Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.
Free cash flow is cash available for discretionary use after capital expenditures. Two main measures: FCFF (to firm) and FCFE (to equity).
Free Cash Flow to the Firm (FCFF)
Cash available to all investors — both equity owners and debtholders.
\[\text{FCFF} = \text{NI} + \text{NCC} + [\text{Int} \times (1 - t)] - \text{FCInv} - \text{WCInv}\]
where NI = net income; NCC = noncash charges (depreciation, amortization); Int = cash interest paid; FCInv = fixed capital investment (capex net of disposals); WCInv = working capital investment.
FCInv = cash spent on fixed assets − cash received from selling fixed assets. Not necessarily the same as CFI (which may include investments in securities and loans).
Cash interest paid (net of tax) is added back because interest goes to debtholders — FCFF includes their portion. Note that NI + NCC − WCInv = CFO under the indirect method, so:
\[\text{FCFF} = \text{CFO} + [\text{Int} \times (1 - t)] - \text{FCInv}\]
IFRS adjustments: if interest paid is in CFF (IFRS option), no interest add-back needed (it's not in CFO). If dividends paid are in CFO under IFRS, add them back (FCFF is pre-distribution to equity). Dividends are not tax-deductible, so no tax adjustment.
Free Cash Flow to Equity (FCFE)
Cash flow available to common shareholders:
\[\text{FCFE} = \text{CFO} - \text{FCInv} + \text{net borrowing}\]
where net borrowing = debt issued − debt repaid (can be negative → subtract).
IFRS: if dividends were deducted in CFO, add them back when calculating FCFE.
CFO $50,000; cash interest paid $500; FCInv = 0 (CFI = 0, no financial investments); net borrowing = +$5,000 (bonds).
FCFF = CFO + Int × (1 − t) − FCInv = 50,000 + 500 × 0.6 − 0 = $50,300.
FCFE = CFO − FCInv + net borrowing = 50,000 − 0 + 5,000 = $55,000.
Alt: FCFE = FCFF − Int(1 − t) + net borrowing = 50,300 − 300 + 5,000 = $55,000.
Cash Flow Performance Ratios
\[\text{Cash-flow-to-revenue} = \dfrac{\text{CFO}}{\text{net revenue}}\]
\[\text{Cash return on assets} = \dfrac{\text{CFO}}{\text{average total assets}}\]
\[\text{Cash return on equity} = \dfrac{\text{CFO}}{\text{average total equity}}\]
\[\text{Cash-to-income} = \dfrac{\text{CFO}}{\text{operating income}}\]
\[\text{Cash flow per share} = \dfrac{\text{CFO} - \text{preferred dividends}}{\text{weighted-average common shares}}\]
If common dividends were in CFO under IFRS, add them back for cash-flow-per-share.
Cash Flow Coverage Ratios
\[\text{Debt coverage} = \dfrac{\text{CFO}}{\text{total debt}}\]
\[\text{Interest coverage} = \dfrac{\text{CFO} + \text{interest paid} + \text{taxes paid}}{\text{interest paid}}\]
(If interest is in CFF under IFRS, no add-back needed.)
\[\text{Reinvestment ratio} = \dfrac{\text{CFO}}{\text{cash paid for long-term assets}}\]
\[\text{Debt payment} = \dfrac{\text{CFO}}{\text{cash long-term debt repayment}}\]
\[\text{Dividend payment} = \dfrac{\text{CFO}}{\text{dividends paid}}\]
\[\text{Investing and financing} = \dfrac{\text{CFO}}{\text{cash outflows from investing and financing}}\]
FCFF＝供所有投資人（股 +債）使用的自由現金。
FCFF = NI + NCC + Int×(1−t) − FCInv − WCInv = CFO + Int×(1−t) − FCInv。
FCInv＝買固定資產 − 賣固定資產（不等同 CFI，CFI 可能包含金融投資與放款）。利息要稅後加回（屬於債權人那塊）。IFRS：若利息已歸 CFF，免加回；若股利已扣於 CFO，要加回。
FCFE＝供普通股股東的自由現金＝CFO − FCInv + 淨借款（淨借款＝發債 − 還債，可負）。
例：CFO 50,000、cash int 500、FCInv 0、淨借款 5,000、稅率 40% → FCFF = 50,000 + 300 = $50,300；FCFE = 50,000 + 5,000 = $55,000。
績效比率：CFO/Rev、CFO/平均資產（cash ROA）、CFO/平均權益（cash ROE）、CFO/營業利益、(CFO−特股息)/WAS（每股 CF）。
覆蓋比率：CFO/總債務（debt coverage）；(CFO+利+稅)/利息（利息覆蓋；IFRS 若利息屬 CFF 則 CFO/利息）；CFO/長期資產投入（reinvestment）；CFO/長債還款（debt payment）；CFO/股利（dividend payment）；CFO/(CFI+CFF 流出)（投資與融資綜合）。
- A. total assets.
- B. total revenue.
- C. the change in cash.
- A. noncash charges.
- B. fixed capital investment.
- C. working capital investment.
- A. pay dividends.
- B. invest in working capital.
- C. acquire long-lived assets.
An analyst should check whether the firm generates positive CFO over time that exceeds its capital spending and whether accounting policies are causing earnings to diverge from CFO. Common-size CFS shows each item as % of revenue, or each inflow/outflow as % of total inflows/outflows.
FCFF (to all investors): NI + NCC + Int(1 − t) − FCInv − WCInv = CFO + Int(1 − t) − FCInv.
FCFE (to equity): CFO − FCInv + net borrowing.
Performance ratios: CFO/Revenue, cash ROA, cash ROE, CFO/operating income, CFO per share. Coverage ratios: debt coverage, interest coverage, reinvestment, debt payment, dividend payment, investing & financing.
31.a：看長期 CFO 是否 > capex、會計政策是否使 NI 與 CFO 偏離；共同尺寸 CFS。
31.b：FCFF = CFO + Int(1−t) − FCInv；FCFE = CFO − FCInv + 淨借款。績效＋覆蓋比率（CFO 為核心）。