What Is Cash Flow Statement?
If you want to know the actual cash position of the company than cash flow statement is used to analyze the real cash the company is actually generating through its operations.
If a company has a cash crunch, it cannot meet its debt obligations, therefore cash flow statement makes things clear before investing your hard earn money.
Whether a company makes a profit or loss, if that company have enough cash it may sustain any downtime occurring due to any reason. Therefore knowing cash flow makes you aware whether a company have a surplus cash in hand to survive bad situations or can get growth and expansion without further debt.
How To Analyze Cash Flow statement Of A Company?
If you want to know how to analyze the cash flow statement of a company given in an annual report, it is important to understand the core activities of a company. That is to say how a company runs its business and where does the money goes and comes from.
There are three types of business activities any company goes through:
- Operational activities (OA): These activities are related to the daily core business operations hence called operational activities. For example, sales, marketing, manufacturing, technology upgrade, resource hiring etc.
- Investing activities (IA): As the name suggests, investing activities deals with investments that the company makes intending to garner benefits at a later stage. For example keeping money in interest-bearing instruments, investing in equity shares, investing in land, property, plant and equipment, intangibles and other non-current assets etc.
- Financing activities (FA): Financials activities is about all financial transactions of the company such as distributing dividends, paying interest to service debt, raising fresh debt, issuing corporate bonds etc.
Each activity that the company undertakes does make an impact on its cash balance.
For understanding purpose I have taken Tata Motors Limited (TML) Annual report, you can download Tata Motors Limited annual report here or even can get it from its website.
Standalone Financial statements represent the company’s standalone numbers/ financials and do not include its subsidiaries’ financials.
Whereas, the consolidated numbers include the companies (i.e. Standalone financials) and its subsidiaries financial statements.
Hence you should look through the consolidated financial statements as it represent the company’s financial position better.
For example in above case of TML (Tata Motors Limited), creating an advertisement for its new car or upgrading it to latest technology will have impact on OA, where as investing money in plants, machinery which by the way is an asset will have impact on IA.
Likewise, paying dividends or interest on current debts will have impact on its FA.
Let us understand this using TML consolidated cash flow statement, however for easy and better understanding we will going to take one part at a time, below is the attached snapshot of TML Operation Activities first, take a look:
As you can see TML have generated Rs.29000.51 crores from its operation activity (OA), Also do note, any company with a positive cash flow from operating activities is a sign of financial well being.
Next in cash flow statement is IA i.e. investing activities, investing activities means money going out. Also, remember healthy investing activities shows the investor that the company is serious about its business growth and expansion.
As you can see in the mage above TML have consumed -26,126.25 cr in Investing activities(IA). Bracket sign indicates minus.
Last but not the least is the financial activities(FA).
Rs.9,904.20 have been used in FA by TML, If you notice the bulk of the money went in repayment of short and long term borrowings. Let us summarize the cash flow from all the activities:
Cash Flow of the company = Net cash flow from operating activities + Net Cash flow from investing activities + Net cash flow from financing activities
Cash Flow of the company = 29,000.51 + (-26126.25) +9,904.20
This means the company consumed or have used total cash of Rs.12,778.46 cr for the financial year 2020-21. Take a look at the last part of the cash flow statement for more insights:
As you can see in above image, this is the last part of the cash flow statement, if you pay attention you can observe that Rs.18,467.80 cr this happens to be the closing balance for the previous year (refer to the arrow marks).
Add to this the current year’s cash equivalents Rs.12,778.46 plus minor forex exchange difference of Rs.453.75, this gives you Cash and cash equivalents as at March 31, (closing balance) Rs.31,700.01 cr.
Likewise, the closing balance of 2020-21 will now be the opening balance for the FY 2021 – 22. This literally shows how much cash TML has in its various bank accounts. As it constitutes cash on hand, this is a liquid asset of the company.
As it is a asset for the company , moreover a current asset which can be used anytime, it should be reflecting in the balance sheet statement as well, take a look below:
Hence cash flow statement and the balance sheet interact with each other not only that all the three financial statements, Profit and loss, balance sheet and cash flow statement are connected to each other.
I hope now you have the basic understanding of How To Analyze profit and loss Of A Company In India, But this is not the end, there are other 2 financial statements you should read and understand i.e. Balance sheet and profit and loss statement to gauge the complete knowledge about how company have performed in an financial year.
I do not want to make it a overdoes hence you can click on above link to know more about them in a detailed way.
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