Last week, I had written two posts about how to read the Cash Flow statement in an Annual Report. An old proverb says: The proof of the pudding is in the eating. The best way to figure out whether you have understood the basic concepts of the Cash Flow statement is to do a simple exercise.
Here are three companies and their condensed Cash Flow statements. Analyse the three on the basis of their Cash Flows, and explain which of the three companies you would like to invest in, and why. All three companies are popular among small investors, but their names have been deliberately hidden to remove any bias in your analysis.
Company ‘A’
| (Rs crore) | Mar '10 | Mar '09 | Mar '08 | Mar '07 | Mar '06 |
| Profit before tax | 710.15 | 157.04 | 344.84 | 231.16 | 92.90 |
| Cash flow - operations | 344.66 | 4.88 | 105.47 | 49.48 | 3.78 |
| Cash Flow - investing | -406.21 | -301.73 | -12.00 | -606.64 | -232.01 |
| Cash Flow - financing | -14.15 | 160.97 | -185.45 | 723.43 | 356.58 |
| Incr/decr in cash | -75.70 | -135.88 | -91.98 | 166.27 | 128.35 |
Company ‘B’
| (Rs crore) | Mar '10 | Mar '09 | Mar '08 | Mar '07 | Mar '06 |
| Profit before tax | 328.84 | 273.78 | 285.33 | 185.10 | 103.73 |
| Cash flow - operations | 179.68 | 46.83 | -377.53 | -127.51 | -83.85 |
| Cash Flow - investing | -127.77 | -236.37 | -132.33 | -426.58 | -288.69 |
| Cash Flow - financing | 8.09 | 113.28 | 463.37 | 533.80 | 164.20 |
| Incr/decr in cash | 59.99 | -76.27 | -46.65 | -20.53 | -208.33 |
Company ‘C’
| (Rs crore) | Mar '10 | Mar ‘09 | Mar ‘08 | Mar ‘07 | Mar ‘06 |
| Profit before tax | 213.64 | 216.23 | 195.62 | 181.01 | 91.90 |
| Cash flow - operations | 1148.20 | 206.11 | -19.21 | -271.94 | -89.61 |
| Cash Flow - investing | 19.20 | -844.59 | -1410.82 | -641.73 | -434.46 |
| Cash Flow - financing | -1176.20 | 626.72 | 1388.16 | 1054.87 | 524.54 |
| Incr/decr in cash | -8.80 | -11.76 | -41.87 | 141.20 | 0.27 |
The last rows in each of the three tables is the sum of the previous three rows, giving the net cash at the end of each year. Negative numbers mean cash outflows; positive numbers mean cash inflows.
If you are one of those who gets scared by tables full of numbers, let me assure you that it isn’t my wish to scare you at all. It is far more scary to invest in the shares of a company without having a clue about how much cash it is generating and using up.
So put on your thinking caps, and give it a shot. Results (and the company names) to be announced next week. Needless to say, the most logical attempt(s) at answering will be duly acknowledged.
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