Cash Flows. Lakehead University. Cash Flow from Assets. September 2003

Transcription

1 Cash Flows Lakehead University September 2003 Cash Flow from Assets Cash flow from assets, sometimes called free cash flow, is one of the most important pieces of information that can be obtained from financial statements. Free cash flow is the firm s cash available to distribute to shareholders and bondholders. 2

2 Cash Flow from Assets From the balance sheet, we know that Assets = Liabilities + Stockholders equity, and thus Cash flow from assets = Cash flow to creditors + Cash flow to shareholders. 3 Cash Flow from Assets Cash flow from assets involves three components: Operating cash flow: cash flow resulting from the day-to-day activities. Capital spending: purchases of long-term, or fixed, operating assets minus sales of long-term operating assets. Additions to net operating working capital: net amount spent on short-term operating assets. 4

3 Unibroue, Inc and 2001 Balance Sheets (in thousands of $) Assets Cash 2,300 1,714 Short-term investments 400 Accounts receivable 3,891 4,435 Inventories 4,128 3,417 Other short-term operating assets Total current assets 10,903 10,600 Property, plant and equipment 21,835 21,089 Other long-term assets 1,250 1,397 Total assets 33,988 33,086 Liabilities and Stockholders Equity Accounts payables and accrued liabilities 3,199 2,257 Instalments on long-term debt Total current liabilities 4,136 3,209 Long-term debt 5,125 5,992 Future income taxes 2,573 2,248 Total equity 22,154 21,637 Total liabilities and equity 33,988 33,086 5 Unibroue, Inc and 2001 Income Statements (in thousands of $, except per share numbers) Sales 23,622 21,580 Cost of goods sold (11,824) (11,540) Selling and administrative expenses (SGA) (7,669) (6,543) Amortization (2,073) (1,833) Operating profit (EBIT) 2,056 1,664 Interest expense (675) (731) Foreign exchange gain Pretax income 1, Taxes (434) (338) Net income Number of shares outstanding 6,111,875 6,235,451 Earnings per share $0.16 $0.10 Stock price (December average) $2.43 $2.00 6

4 Unibroue 2002 Statement of Cash Flows Operating Activities Net income after taxes 961 Amortization of PP&E 1,760 Amortization of other assets 313 Deferred taxes 325 Net cash from operations 3,359 Changes in non-cash working capital items 825 Cash flow from operating activities (CFO) 4,184 Investing Activities Short-term investments 400 PP&E (2,507) Other assets (166) Cash flow from investing activities (2,273) Financing Activities Repayment of long-term debt (882) Redemption of shares (443) Cash flow from financing activities (1,325) Net increase in cash and cash equivalents 586 Cash, beginning of the year 1,714 Cash, end of the year 2,300 7 Operating Cash Flow Operating cash flow is revenues minus cash costs, which means that depreciation and deferred taxes will be excluded. This calculation also excludes interest expense, as this is a financing expense and will appear in the cash flow to bondholders. Note that the exclusion of financing expense contrasts with cash flow from operating activities. 8

5 Operating Cash Flow Operating cash flow (OCF) can be calculated from the top or the bottom of the income statement: Top: Bottom: OCF = EBIT + Depreciation Current taxes OCF = Net income + Depreciation + Deferred taxes + Interest expense More generally, OCF = EBIT + Depreciation Other cash, operating expenses OCF = Net income + Non-cash, non-operating expenses 9 Operating Cash Flow: An example Unibroue s 2002 non-cash expenses were depreciation (2,073) and deferred taxes (2, 573 2, 248 = 325). If taxes are 434 and deferred taxes are 325, current taxes are 109. Unibroue had one non-operating expenses in 2002, which is its interest expense (675). Unibroue had one non-operating income in 2002, its foreign exchange gain (14). 10

6 Operating Cash Flow: An example Unibroue s OCF in 2002 was OCF = EBIT + Depreciation Current taxes = 2, , = 4, 020 Similarly, OCF = Net income + Non-cash, non-operating expenses = ,073 = 4, Note on Operating Cash Flow Note that taxes have been saved because of the interest expense and that more taxes have been paid because of the foreign exchange gain. One could take these effects into account by calculating operating cash flow differently: OCF = (1 t)ebit + Depreciation + Deferred Taxes, where t is the company s tax rate. 12

7 Note on Operating Cash Flow Unibroue s marginal tax rate in 2002 was 31.16% (manufacturing and processing Québec rate), which gives us OCF = (1.3116) 2, , = 3,813. This measure is more conservative since it takes into account taxes paid/saved due to non-operating income/expenses. 13 Note on Operating Cash Flow When forecasting you cannot predict deferred taxes and you may not know exactly what interest payments will be and thus may be more appropriate. OCF = (1 t)ebit + Depreciation 14

8 Note on Operating Cash Flow Net operating profit after taxes (NOPAT) is defined as NOPAT = (1 t)ebit + Deferred Taxes If the amount of deferred taxes is not known, then NOPAT is simply NOPAT = (1 t)ebit 15 Net Capital Spending Net capital spending (NCS) can be calculated as NCS = Ending net fixed assets Beginning net fixed assets + Amortization Note the addition of depreciation, without which NCS would be understated. Note also that we are using net fixed assets (NFA) in this equation. 16

9 Net Capital Spending Similarly, net capital spending could be calculated as follows: NCS = Ending fixed assets Beginning fixed assets. Note that the asset values used here are not net of amortization and thus we don t need to add amortization. 17 Net Capital Spending: An example For Unibroue, Net capital spending in 2002 was NCS = End. NFA Beg. NFA + Amortization = 23,085 22, ,073 = 2,672 18

10 Additions to Net Operating Working Capital Operating cash flow is calculated from the income statement and thus includes transactions for which cash has not been collected yet. Additions to net operating working capital solves this problem by looking at the accounts that have yet to be received (accounts receivable). We only look at operating accounts, i.e. accounts such as short-term investments and short-term debt are excluded. An operating asset or liability does not involve any interest payment. 19 Additions to Net Operating Working Capital: An example For Unibroue, NOWC in 2001 was 10, ,257 = 7,943 and NOWC in 2002 was 10,903 3,199 = 7,704 for a change of NOWC = 7,704 7,943 = 239 in

11 Cash Flow from Assets Cash flow from assets, CF(A), can then be calculated as follows: CF(A) = OCF NCS NOWC. Note that an increase in NOWC means a net purchase of short-term assets and thus less cash to distribute to bondholders and shareholders. Hence this amount has to be subtracted from OCF to obtain CF(A). The same reasoning applies to NCS. 21 Cash Flow from Assets: An example For Jamus Mesamus, this means CF(A) = OCF NCS NOWC = 4,020 2,672 ( 239) = 1, 587. That is, a net cash flow of $1,587,000 has been generated by Unibroue in

12 Cash Flow from Assets: Conclusion Operating cash flow is a crucial indicator of a firm s capacity to generate return to its stakeholders. A firm with a negative operating cash flow does not generate enough revenue to cover operating costs. A negative cash flow from assets is not alarming when the firm is growing. It should nevertheless be positive at some point in time otherwise the return from investing in the firm cannot be positive. 23