Tuesday, May 01, 2007

Cash Flow

To enable you to have a better understanding of what is happening in a company; you need to have a good look at the Cash Flow statement. Whether in good time or bad time, cash is still the king. With cash, you can even ask the supernatural to push cars for you; without it, to move one step forward is difficult. (Chinese proverb)

Cash flow is cash coming in and cash going out. Operating cash flow is net cash inflow from operating activities.

A profitable company may have liquidity problem if its cash inflow is inefficient. That means its incoming cash derived from its services or products is not enough to meet its outgoing cash obligations, such as salaries and wages, rental, utility bills, telephone bills, etc.

Operating cash flow minus tax, interest, and capital expenditure is called free cash flow (fcf). Thus fcf is cash that is left after all essential bills and what must be paid to stay in business, have been paid.

The management has the option to decide what to do with the fcf. It can be paid as dividends to its shareholders; for share buy-backs; for acquisition or simply be retained in the company. What it does is reflective of its view for the company going forward.

Thus, don’t forget to look closely at the Cash Flow statement when you evaluate the solvency of the company.