Cash-Flow Statement & Forbes 2015 Sports Valuations – Comprehensive Bullet-Point Notes

Sports Business Context – Forbes 2015 Rankings

  • Forbes annually lists the 50 most valuable professional sports teams; 2015 list is the focus.
  • Value driver: revenue generation (especially from audiovisual/media rights).
  • Real Madrid retained the global No. 1 spot for a 3rd consecutive year.
    • Estimated value 3.260 billion USD3.260\text{ billion USD}.
    • Season revenue exceeded 700 million USD700\text{ million USD} despite a Champions-League semi-final exit.
    • Dominant television-rights income underpins valuation.
  • NFL franchises surge because of massive new TV deals:
    • League-wide media income expected to top 6.5 billion USD6.5\text{ billion USD} in 2016.
    • DirecTV Sunday Ticket extension alone adds 1.5 billion USD1.5\text{ billion USD} per season.
    • Dallas Cowboys (No. 2 overall) poised to overtake Real Madrid in future rankings.
  • Other headline media contracts (illustrating revenue boom across sports):
    • English Premier League & Sky/BT: 2.7 billion USD yr−12.7\text{ billion USD yr}^{-1} (+70 % vs prior deal) starting 2016.
    • NBA, ESPN & TNT: >2.66 billion USD yr−12.66\text{ billion USD yr}^{-1} (≈3× previous figures).
    • MLB & Time Warner Cable (multiple-year): 8.35 billion USD8.35\text{ billion USD}.
  • Dallas Cowboys specifics
    • Current value 3.200 billion USD3.200\text{ billion USD} (tied 2nd).
    • AT&T Stadium generates >100 million USD yr−1100\text{ million USD yr}^{-1} (tickets & suites).
    • Naming-rights deal: AT&T pays 500 million USD500\text{ million USD} over 25 yrs.
    • NFL salary cap tempers costs, so rising media inflows largely drop to cash.
  • New York Yankees specifics
    • Value 3.200 billion USD3.200\text{ billion USD} (tied 2nd; MLB leader).
    • YES Network created in 2002; top regional sports network in NY 11/12 yrs.
    • 2015 value +28 % despite missing play-offs 2nd straight year; avg attendance 42 520.
  • Top-50 composition: 20 NFL, 12 MLB, 10 NBA, 7 football (soccer), 1 F1 (Ferrari, 1.350 billion USD1.350\text{ billion USD}, 32nd), 1 NHL (Toronto Maple Leafs, 1.300 billion USD1.300\text{ billion USD}, 37th).

From Revenues to Cash – Why the Cash-Flow Statement (CFS) Matters

  • Accrual accounting distinguishes revenues/expenses from actual cash collections/payments.
  • Profit & Loss Statement (P&L) shows accounting performance (net income).
  • Cash-Flow Statement shows liquidity: real inflows/outflows during a period.
  • Key questions answered:
    • Is the core business generating cash?
    • Can the firm invest/grow?
    • Is it able to service debt?
    • Can it pay dividends?
  • Practical edge: unifies information from both Balance Sheet (BS) and P&L in one report.
  • Not mandatory in every jurisdiction; multiple presentation formats exist.
    • U.S. template guided by FASB SFAS 95.

Three Standard Cash-Flow Categories

  1. Operating Activities (CFO)
    • Derived from day-to-day business: net income adjusted for non-cash items & working-capital changes.
    • Healthy firm: CFO typically >0.
  2. Investing Activities (CFI)
    • Mainly acquisition/disposal of non-current (fixed) assets.
    • Growth firm: CFI normally <0 (CAPEX spending). A positive CFI implies asset sales (divestment).
  3. Financing Activities (CFF)
    • Changes in debt and equity, plus dividends & share buy-backs.
    • Sign depends on strategic posture—raising funds ( + ) vs repaying/returning funds ( − ).

Fundamental Formulae & Quick Conversions

  • Cash reconciliation:
    Ending Cash=Beginning Cash+CFO+CFI+CFF\text{Ending Cash}=\text{Beginning Cash}+\text{CFO}+\text{CFI}+\text{CFF}
  • Operating cash (indirect method):
    CFO=Net Income+Non-Cash Charges+ΔWorking Capital\text{CFO}=\text{Net Income}+\text{Non-Cash Charges}+\Delta\text{Working Capital}
  • CAPEX (when only BS data available):
    CAPEX=ΔGross Fixed Assets\text{CAPEX}=\Delta\text{Gross Fixed Assets}
    (Use gross book value; depreciation/amortisation are non-cash.)

Step-by-Step Construction Template

  1. Identify beginning cash from the opening BS.
  2. Compute CFO
    • Start with net income.
    • Add back depreciation & amortisation (D&A) and any other non-cash expenses.
    • Adjust for working-capital movements (Δ inventory, Δ receivables, Δ payables, etc.).
  3. Compute CFI
    • Measure net change in gross non-current assets (tangible & intangible).
    • Sign convention: purchases (CAPEX) negative; asset sales positive.
  4. Compute CFF
    • Track movements in short-term & long-term debt, share capital, share buy-backs, dividends.
    • Increases in liabilities/equity → +cash; decreases → −cash.
  5. Sum CFO + CFI + CFF to obtain cash generated/consumed.
  6. Add to beginning cash → ending cash; tie back to closing BS as a control check.

Worked Example 1 – Nike Inc. FY-2015 (figures USD millions)

  • Beginning cash: 4 2924\,292.
  • CFO: 4 6804\,680
    • Net income 3 2733\,273.
    • D&A 649649.
    • Δ Inventory −290-290 (cash −).
    • Δ A/R +76+76 (collection, cash +).
    • Δ A/P +301+301 (supplier financing, cash +).
    • Δ Other current assets +671+671.
  • CFI: −175-175 (CAPEX).
  • CFF: −2 873-2\,873
    • Δ Short-term debt −89-89.
    • Dividends −899-899; Share buy-backs −1 885-1\,885.
  • Cash generated: 1 6321\,632.
  • Ending cash: 5 9245\,924 — matches BS.

Worked Example 2 – Under Armour FY-2014 (all figures USD millions)

Context & Control Numbers

  • Opening cash 347.5347.5; closing cash 493.2493.2 ⇒ cash generated 145.7145.7.
  • Net income 208.0208.0 (≠ cash!).

Detailed Calculation

1 – Operating Activities
  • Net income 208.0208.0.
  • + D&A 72.172.1.
  • Working-capital adjustments:
    • Δ Inventory −90.4-90.4 (built stock, cash −).
    • Δ A/R −89.3-89.3 (more credit to customers, cash −).
    • Δ A/P +45.0+45.0 (supplier credit, cash +).
  • CFO = 208.0+72.1−90.4−89.3+45.0=145.4208.0+72.1-90.4-89.3+45.0=145.4.
2 – Investing Activities
  • Δ Gross tangible fixed assets = +135.8+135.8.
  • Δ Gross intangible assets = +2.1+2.1.
  • CAPEX = 137.9137.9 ⇒ CFI =−137.9= -137.9.
3 – Financing Activities
  • Δ Short-term debt +50.0+50.0.
  • Δ Long-term debt +88.2+88.2.
  • No equity issuance, no dividend (retained earnings increase mirrors prior-year NI).
  • CFF =+138.2= +138.2.
4 – Reconciliation

Cash Generated=145.4−137.9+138.2=145.7\text{Cash Generated}=145.4-137.9+138.2=145.7.
Ending Cash=347.5+145.7=493.2\text{Ending Cash}=347.5+145.7=493.2 ✓ (ties to BS).

Interpretation

  • Operations alone covered all CAPEX (strong internal financing capability).
  • Additional debt draw (138.2138.2) likely pre-funds future growth initiatives.

Key Interpretive Insights & Practical Implications

  • A firm can report positive net income yet bleed cash if receivables/inventory balloon or capex/dividends outstrip operating inflow.
  • Conversely, negative net income can coincide with positive cash generation (e.g., heavy non-cash charges or working-capital release).
  • Persistent negative CFO signals structural issues; persistent negative CFI usually signals growth investment; persistent positive CFF may indicate rising leverage risk.
  • Investors, creditors, and managers use CFS to assess liquidity, sustainability of dividends, and capacity to fund expansion.
  • Ethical/strategic angle: Favouring non-cash expenses (depreciation policy) lowers taxes but does not improve liquidity per se—CFS makes this transparent.
  • In sports franchises, massive guaranteed media revenues translate into predictable CFO, which in turn underpins soaring valuations (as illustrated with NFL, EPL, NBA, etc.).

Quick Reference Cheat-Sheet

  • \text{CFO}>0 → operations supply cash.
  • \text{CFI}<0 → firm investing in long-term assets (growth mode).
  • \text{CFF}>0 → raising capital (debt/equity); <0 → returning capital (repayments/dividends/buy-backs).
  • Always reconcile ending cash to BS; mismatch = error in CFS build.
  • Remember: Increase in asset ⇒ uses cash ( − ); increase in liability/equity ⇒ sources cash ( + ).