Cash Flow Analysis

A Comprehensive Examination of Cash Flow Patterns: An In-

Depth Analysis

Q. What do you mean by Cash Flow Analysis?

A.

Cash flow analysis refers to the examination of the inflows and outflows of cash within an
organization over a specific period of time. It is a crucial component of financial analysis that
provides valuable insights into the cash position and liquidity of a company, ultimately
assessing its ability to generate sufficient cash to meet its financial obligations.
The primary purpose of cash flow analysis is to evaluate the cash inflows and outflows from
three key activities: operating, investing, and financing. Operating activities involve the core
business operations and include cash generated from sales, payment of expenses, and receipt
of dividends, among others. Investing activities refer to the cash flows from the purchase or
sale of long-term assets, such as investments, property, plant, and equipment. Lastly,
financing activities involve the cash flows related to raising capital, repayment of debts, and
payment of dividends to shareholders.
The analysis of cash flows enables organizations to make informed decisions regarding their
financial stability, investment opportunities, and capital allocation. By assessing the sources
and uses of cash, management can determine the company's ability to generate cash internally
or secure external financing when needed. Moreover, cash flow analysis aids in evaluating
the sustainability of a firm's operations and its ability to generate consistent cash inflows in
the long run.
There are several financial metrics employed in cash flow analysis, including the cash flow
statement, which provides a comprehensive overview of all cash inflows and outflows,
categorized into operating, investing, and financing activities. Additionally, other ratios and
indicators are utilized, such as the operating cash flow ratio, free cash flow, and cash
conversion cycle, to gain a deeper understanding of a company's cash performance and
liquidity position.
The results from a cash flow analysis can serve various stakeholders, including investors,
creditors, and management. Investors rely on cash flow analysis to assess the financial health
of a company, its ability to generate returns, and its capacity to distribute dividends.
Creditors, on the other hand, utilize cash flow analysis to evaluate the repayment ability of a
borrower. Finally, management can utilize the findings from cash flow analysis to make
informed financial decisions, such as setting financial targets, planning investments, and
devising strategies to improve cash flow management.
In conclusion, cash flow analysis is a crucial tool in financial analysis that helps organizations
evaluate their cash position, liquidity, and ability to generate and manage cash. By examining
the cash flows from operating, investing, and financing activities, stakeholders can obtain
valuable insights into a company's financial stability and make informed decisions regarding
investments, financing options, and overall financial management.

Q. Cash Flow Analysis significance from company’s perspective.

A.
Cash flow analysis holds great significance from a company's perspective as it provides in-
depth insights into the financial health and stability of the business. By evaluating the inflows
and outflows of cash, companies can effectively manage their liquidity and make informed
decisions regarding investment, financing, and operational activities.
One of the primary advantages of cash flow analysis is its ability to highlight a company's
ability to generate cash from its operating activities. This is crucial as it indicates the
company's ability to fund its day-to-day operations, such as paying suppliers, meeting payroll
obligations, and investing in growth opportunities. By monitoring operating cash flows,
companies can gauge their ability to meet short-term obligations and ensure the smooth
functioning of their business operations.
Furthermore, cash flow analysis enables companies to identify any potential liquidity issues
that may arise in the future. By examining the cash inflows and outflows, businesses can
forecast their cash position and identify periods of cash shortages or excesses. This foresight
helps organizations to initiate appropriate measures to address cash deficits, such as securing
external financing or optimizing working capital management. On the other hand, excess cash
can be deployed strategically to invest in profitable projects or make debt repayments,
thereby minimizing interest expenses.
Cash flow analysis also aids in evaluating the efficiency and effectiveness of a company's
investment and financing decisions. By examining the cash flow generated from investing
activities, companies can assess the returns on their capital investments and determine
whether those investments are generating positive cash flows. Similarly, the analysis of cash
flows from financing activities allows organizations to assess the impact of various financing
sources, such as equity or debt, on their cash position. This knowledge enables companies to
make well-informed decisions regarding their capital structure and financing strategies.
Moreover, cash flow analysis helps in assessing the company's ability to generate future cash
flows, which is crucial from the perspective of credit providers and investors. By evaluating
cash flow patterns and trends, lenders and investors can gauge the likelihood of a company's
ability to meet its financial obligations and generate a return on their investment. Positive and
consistent cash flows reassure stakeholders about the financial stability and sustainable
growth of the company.
In conclusion, cash flow analysis holds immense significance from a company's perspective
as it provides valuable insights into the financial health and stability of the business. It aids in
evaluating liquidity, identifying potential cash flow issues, assessing investment and
financing decisions, and instilling confidence in stakeholders. By conducting regular cash
flow analysis, companies can effectively manage their cash resources, ensure smooth
operations, and make informed decisions to drive sustainable growth.
Q. What do you mean by: -
(a) Cash Flow from Operations
Cash flow from operations, also known as operating cash flow or cash flow from operating
activities, is a financial metric that measures the amount of cash generated or used by a
company's core business operations during a specific period. It represents the cash inflows
and outflows directly related to the day-to-day operations of a business, excluding cash flows
from investing or financing activities.
This metric provides insights into a company's ability to generate sufficient cash from its
normal operations to cover its operating expenses, pay off debt, and invest in its growth. It is
considered an important indicator of a company's financial health and stability, as it reflects
the underlying cash-generating capacity of the business.
Cash flows from operations are derived from the company's income statement and balance
sheet. It includes cash received from customers for the sale of goods or services and cash paid
to suppliers for the purchase of goods or services. It also includes cash paid to employees as
wages, cash paid for taxes, and other operating expenses.
It is important to note that cash flow from operations can be either positive or negative. A
positive cash flow from operations indicates that the company is generating more cash from
its operations than it is using, thereby providing a strong foundation for meeting financial
commitments and pursuing growth opportunities. On the other hand, a negative cash flow
from operations suggests that the company is using more cash than it is generating, which
may raise concerns about its ability to sustain its operations in the long term.
In conclusion, cash flow from operations is a fundamental measure of a company's ability to
generate cash from its core business activities. It provides insights into a company's financial
performance and is closely monitored by investors, lenders, and analysts to assess the
company's financial health and management's ability to efficiently manage its operations.

(b) Cash Flow from Investing

Cash flow from investing refers to the net cash outflow or inflow resulting from investments
made by a company during a specific accounting period. Investing activities generally
include the acquisition, disposal, and impairment of long-term assets such as property, plant,
and equipment (PPE), as well as investments in securities and loans granted to other
companies.
Cash inflows from investing activities may arise from the sale of long-term assets, such as the
sale of property or equipment, or from the disposal of investments such as stocks or bonds.
Additionally, the collection of loan repayments or interest income from loans granted to other
entities can also contribute to cash inflows from investing.
On the other hand, cash outflows from investing activities primarily stem from the purchase
or addition of long-term assets, which involve cash payments made to acquire or construct
properties, buy equipment, or invest in securities. These outflows also include loans granted
to other companies or entities.
It is important to note that cash flow from investing activities provides insights into the
capital expenditure decisions made by a company, reflecting its ability to expand and grow its
asset base. Positive cash flow from investing activities indicates that the company is
generating enough cash to make investments in long-term assets, potentially implying future
growth prospects. Conversely, negative cash flow from investing activities highlights that the
company is using substantial amounts of cash in acquiring or disposing of assets, potentially
indicating a decrease in its asset base.
In summary, cash flow from investing activities represents the net cash effect of investing
activities undertaken by a company during a specific accounting period. Understanding this
aspect of a company's financial statements can provide meaningful insights into its
investment decisions and overall financial health.

(c)Cash flow from Financing

Cash flow from finance refers to the movement of money in and out of a company's financial
activities over a specific period of time. It represents the net amount of cash generated or
used by a company through its financing activities, including the issuance and repayment of
debt, issuance and repurchase of equity, and payment of dividends.
Cash flow from finance is a crucial aspect of financial analysis as it provides insights into a
company's ability to manage its financial obligations and fund its operations. Positive cash
flow from finance indicates that a company is generating more cash from its financing
activities than it is using, which can be a sign of financial stability and strength. On the other
hand, negative cash flow from finance suggests that a company is relying on external
financing or depleting its cash reserves to meet its financial obligations.
Analyzing cash flow from finance also helps investors and analysts evaluate a company's
capital structure and its ability to raise capital in the future. By tracking the inflows and
outflows of cash related to financing activities, stakeholders can assess whether a company is
heavily reliant on debt or equity, and how it utilizes those funds to support its growth
strategies.
Furthermore, cash flow from finance is an essential component of the statement of cash
flows, a financial statement that provides a comprehensive overview of a company's cash
flows from operating, investing, and financing activities. The cash flow statement enables
stakeholders to assess a company's overall liquidity, financial health, and ability to generate
cash to meet its financial obligations.
In conclusion, cash flow from finance is a key financial metric that reflects the inflows and
outflows of cash resulting from a company's financing activities. It plays a vital role in
evaluating a company's financial performance, capital structure, and overall financial health.
Q. What is Free Cash Flow?
A.
Free cash flow (FCF) is commonly regarded as a significant financial metric used to assess a
company's financial health and performance. It represents the amount of cash generated by a
business after deducting its operating expenses and capital expenditures. This metric provides
insights into a company's ability to generate surplus cash that can be utilized for various
purposes such as reinvestment in the business, paying off debts, distributing dividends to
shareholders, or pursuing growth opportunities. FCF is considered a crucial measure as it
represents the true cash flow available to a company's stakeholders, excluding non-cash items
like depreciation and amortization. By analyzing FCF, investors and financial analysts can
evaluate the sustainability of a company's cash flows and its potential for long-term growth
and value creation.

Q. What do you mean by positive and negative cash flow?

A.
Positive and negative cash flow are terms used in financial accounting to describe the
movement of cash in and out of a business or individual's bank account. Cash flow refers to
the amount of cash generated by a business or individual over a given period of time. A
positive cash flow occurs when the cash inflows exceed the cash outflows, resulting in an
overall increase in the amount of cash available. This can occur when a business generates
more revenue than expenses, when an individual receives more income than they spend, or
when loans are repaid.
On the other hand, negative cash flow happens when the cash outflows exceed the cash
inflows, resulting in a decrease in the amount of cash available. Negative cash flow can occur
when a business faces higher expenses than revenue, when an individual spends more money
than they earn, or when loans or debts are taken on. This situation can lead to financial
challenges and potentially bankruptcy if sustained over a prolonged period.
Positive and negative cash flow have significant implications for businesses and individuals.
A positive cash flow provides financial stability and the ability to invest in growth
opportunities, repay debts, and save for future needs. It indicates that the business or
individual is generating sufficient income to cover expenses and meet financial obligations.
Conversely, negative cash flow can be a warning sign of financial instability and potential
insolvency. It may require borrowing money or seeking additional sources of income to cover
expenses and repay debts.
Monitoring and managing cash flow is essential for financial planning and decision-making.
By understanding and analyzing cash flow patterns, businesses and individuals can make
informed choices about expenditure, revenue generation, and investment strategies to ensure
a healthy and sustainable financial position.
Q. Analyze the statement shared with you in details. What does it say you about
the company's financial position?
To analyze the balance sheet, we will use the help of Ratio Analyzation
Current Ratio
The current ratio measures your liquidity—how easily your current assets can be converted to
cash in order to cover your short-term liabilities. The higher the ratio, the more liquid your
assets.
Current Ratio = Current Assets / Current Liabilities

For March 20: 487.05/1,355.37 = 0.421

For March 21: 708.46/ 1157.03 = 0.612
For March 22: 1395/ 1824.64 = 0.764
For March 23: 797.6/ 1722.67 = 0.463
For March 24: 596.72/ 1683.1 = 0.354
Your current ratio shouldn’t dip far below 2:1; if it’s less than 1:1, you don’t have enough
current assets on hand to cover your short-term debts, and you’re in a tight position. The
higher your ratio, the better able you are to cover liabilities.
Since company’s current ratio is below 1:1 from March 20-24, therefore company don’t have
enough current to meet its short-term obligation.

Debt to equity ratio

The debt to equity ratio tells you how much your business depends on equity versus
borrowed money.
Debt to Equity Ratio = Total Debt / Owner or Shareholders’ Equity

For March 20: 91.2+ 450.5/ 1143.58= 0.473

We can see that that company has debt to equity ratio below 1 from marc 20-24 which is very
low DE ratio.
This means that the company’s shareholder’s equity is in excess and it does not need to tap its
debt to finance its operations and business. The company has more of owned capital than
borrowed capital and this speaks highly of the company.

Deb