Lc4-pt1- Financial Analysis Cash Flow Statements

What are the three key financial statements?

• Income Statement: Like a giant subtraction sum, it "keeps score" on performance.

• Balance Sheet: Like a rental flat inventory, it shows what is owned.

• Cash Flow Statement: Like a bank statement, it explains changes in cash reserves.

Why is the cash flow statement important?

• Revenues are vanity, profits are sanity, cash is reality.

• It provides a clear view of cash available, removing accounting simplifications.

• Critical for understanding a business's ability to operate.

What is the formula for the Cash Conversion Ratio?

Cash Conversion Ratio = (Cash Generated from Operations ÷ Operating Profit) × 100

What does a high Cash Conversion Ratio indicate?

• Indicates good alignment between cash flow and income statement.

• Low ratios may suggest accounting issues.

What is CAPEX?

Capital expenditure or capital investment, refers to spending on long-term physical productive assets, such as property, plant, and equipment.

What is the formula for CAPEX to Revenue?

CAPEX to Revenue = (Capital Expenditure ÷ Revenue) × 100

What are the two specialised cash flow metrics discussed?

• EBITDA: Earnings Before Interest, Tax, Depreciation, and Amortisation.

• Free Cash Flow: Cash generated after accounting for CAPEX and tax.

What are the advantages of using Free Cash Flow over EBITDA?

• Takes investment costs into account.

• Provides a thorough and detailed measure of cash flow.

• Preferred for high-growth, high-investment companies.

How do you calculate EBITDA?

EBITDA = Operating Profit + Depreciation + Amortisation

How is Free Cash Flow calculated?

Free Cash Flow = Cash Generated from Operations − CAPEX − Tax

Importance of Capex

Higher Capex means greaterproportion of retained profits are ploughed back