1. CASH FLOW

2. RECAP OVERVIEW: Story of Business Told In The 3 Financial Statements. . .
Why do we want to study about ratios?
They tell us story to understand a few things…. How well are they managing their operations? What is the health of the business? How profitable is it?
For those who were here last month, what are some of the profit ratios we’ve touched on?

3. Business Told In Financial Statements
Profit & Loss
Document 1
Balance
Sheet
Document 3
Cash-Flow
Document 5
Comprehensive Income
Document 2
Changes In Equity
Document 4
Notes To Financial Statement
Document 6
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4. Business Told In Financial Statements
Profit & Loss
Balance Sheet
Cash-Flow
From Operations
Revenue
Assets
In The
Business
Liability -
Expenses
From Investing
Owner’s
Equity
Profit =
From Financing
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5. Business Told In Financial Statements
Profit & Loss
Balance Sheet
Cash-Flow
From Operations
Revenue
Assets
In The
Business
Liability -
Expenses
From Investing
Owner’s
Equity
Cash-Flow From Operations (CFO) is a measure of cash in Profit & Loss Statement.
Quality of earnings is checking NPAT vs Net CFO.
CFO is a equivalent to your P&L.
This is why quality of earnings is checking the NPAT vs Net Cash-Flow From Operations
Profit =
From Financing
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6. Business Told In Financial Statements
Profit & Loss
Balance Sheet
Cash-Flow
Depending on CAPEX type, maintain or increase revenue following year in P&L
Revenue
From Operations
Revenue
Cash-Flow From Investing (CFI) cash which maintain or increase company’s asset base.
Assets
In The
Business
Liability -
Expenses
From Investing
Owner’s
Equity
Profit =
From Financing
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7. Business Told In Financial Statements
Profit & Loss
Balance Sheet
Cash-Flow
Sometimes, you may see management invest in “Other” non-core business for a variety of reasons.
Strategic stake, opportunistic….
Minimum! FOCUS!
Revenue
From Operations
Revenue
Assets
In The
Business
Liability -
Expenses
From Investing
Owner’s
Equity
Profit =
From Financing
Other Assets
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8. Business Told In Financial Statements
Profit & Loss
Balance Sheet
Cash-Flow
From Operations
Revenue
Cash-Flow From Financing (CFF) are cash-flows affecting the company’s funding for the assets.
Taking / Repaying Loans.
Raise fund from shareholder
Assets
In The
Business
Liability -
Expenses
From Investing
Owner’s
Equity
Profit =
From Financing
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9. Cash Flow Statement… Why do we want to study about ratios?
They tell us story to understand a few things…. How well are they managing their operations? What is the health of the business? How profitable is it?
For those who were here last month, what are some of the profit ratios we’ve touched on?

10. Its All About The Cash
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11. It’s All About The Cash. . . . Cash-Flow From Operations
Cash is the lifeblood of the business.
A company does not collect their revenue if they extend credit terms to customers.
From Operations
From Investing
From Financing
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12. It’s All About The Cash. . . . Cash-Flow From Operations
Provides more consistency and dependability for accrual accounting.
Serves as a flow chart of how money enters the business and where it goes.
Accounting:
Cash basis of accounting.
Actual company cash inflow ‘+’ve & outflow ‘-’ve.
Revenues reported when cash is received from customers or Expenses when cash is paid out.
From Operations
From Investing
From Financing
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13. Cash-Flow From Operations
Operating Activities
CFO is cash produced by the company’s business operations.
Avoid companies with rising CFO but falling cash flow per share possibly due to new shares issued which dilutes value more than it earns for shareholder.
RUN from companies with consecutively increasing NPAT but (‘-’ve) net cash-flow from operations.
Shows that IT’S BLEEDING!!
From Operations
From Investing
From Financing
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14. Cash-Flow From Investing
Investing Activities
Cash inflow / outflows from buying or upgrading ASSETS (BS) of the company.
Capital Expenditure (capex) is the focus (2 types):
Maintenance capex
MAINTAINS business revenue & operations.
E.g. machine maintenance, shop renovation...
Development capex
GROWS business revenue & operations.
E.g. new production lines, more shops..
Usually known as:
“purchase of property plant and equipment”
“capital work-in-progress”
Consider intangible assets as capex if purchased consistently year-on-year and needed for business.
From Operations
From Investing
From Financing
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15. Cash-Flow From Investing
CAPEX:
P.P.E. +
C.WIP
CWIP is also CAPEX
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that asset up to the balance sheet date are transferred to an account called Capital Work in Progress Account. Contains all expenses incurred on the asset until it is converted into working condition
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16. Cash-Flow From Financing
Financing Activities
Handling of debt and relationship with shareholders. Shows management’s financial discipline.
Cash inflow / outflows from financing activities:
(BS:Equity) Share issued / buyback.
(BS:Equity) Dividends paid.
(BS:Liability) Bonds coupon issued / payments.
(BS:Liability) Bank loans / repayments + interest.
Affects the Liabilities (BS) & Equity (BS).
From Operations
From Investing
From Financing
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17. Cash-Flow From Financing
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18. Financial Ratios Why do we want to study about ratios?
They tell us story to understand a few things…. How well are they managing their operations? What is the health of the business? How profitable is it?
For those who were here last month, what are some of the profit ratios we’ve touched on?

19. Technical Focus Quality of Earnings Free Cash Flow
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20. Quality of Earnings (QoE)
CFO
NPAT
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21. Quality of Earnings (QoE)
What is quality of earnings?
Make sure reported income is close to actual cash that is coming in.
It helps us highlight any potential irregularities or red flags such as delay of payments from trade receivables, etc..
It helps us peel away layers of accounting or artificial profits created by inflation of inventory or other asset prices. We are looking at pure, organic cash.
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22. Quality of Earnings (QoE)
QoE more than 1.0 – means net amount of organic cash flow is more than reported earnings.
CONSISTENCY!! - Scan for a track record for at least past 4-5 years.
If QoE is less than 0.9, this suggests there may be some aggressive accounting treatments usually due to one-off items such as:
Fair value gain of assets
Sale of assets
Sale of subsidiaries
You might want to explore and investigate. There are cases where QoE drops below 1 for legit reasons. But rarely and not consecutive!
CFO
NPAT
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23. Quality of Earnings (Examples)
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24. Quality of Earnings (Examples)
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25. Quality of Earnings (Examples)
For 2013:
It issued a lot of shares and raised $43.4million. It also borrowed $3.7 million.
For 2012:
It issued a lot of shares and raised $6.6 million. It also borrowed $2.9 million.
Very bad signs! This means the company is in need of a lot of money.
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26. Free Cash Flow

27. Free Cash Flow What is free cash flow?
It is the money left after paying the cost of doing business, and maintenance needed to stay in business or capital expenditure.
“Ultimate profitability”
You want a good growth company to have positive free cash flow.
You can generate enormous amounts of cash flow from operations but still not be truly profitable if they are required to continuously inrevest that cash into their infrastructure
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28. Free Cash Flow
As a business owner, what can positive free cash flow do for me?
Make value accretive acquisitions.
Return earnings to shareholders in the form of dividends.
Strengthen the flexibility of the balance sheet by paying off any existing debt.
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29. Capital Allocation
“Proper allocation of capital is an investor’s [CEO] number one job”
Building long term value per share is the capital allocator’s ultimate objective.
Superior capital allocation is what sets apart the best CEO from the rest; it forms the critical performance of their companies long-term business success.
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30. Capital Allocation Source of Capital: Internal / operational cash flow
The Capital Allocator
Source of Capital:
Internal / operational cash flow
Debt issuance
Equity issuance
Deployment of Capital:
Invest in existing operations
Acquire other businesses
Issue dividends
Pay down debt
Repurchase stocks
Most of the CEOs earn their positions by doing very well in other areas. Some in marketing, engineering, finance, administration. But once you think of it carefully, you will gain the clarity that the job of a CEO is not to run the business – it is to think of strategies to grow the business, and allocate capital which is not easy.
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