Q&A: cCFO vs cPAT, Basic & Diluted EPS, Conference Calls

Modified on July 5, 2018

The current article in this series provides responses related to:

  • Sources of conference call (concall) transcripts
  • Cumulative CFO vs cumulative PAT
  • Basic and diluted EPS

 

 

Query

Hello Dr. Stock,

I have noticed that in the various stock analysis, you use management past conference call scripts or management interview scripts as a tool of analysis. From which source do you get such information?

I tried searching on companies’ website – Investors’ relation segment, but couldn’t find any. Also, I tried doing a google search but I failed.

Please advise the source to find this information.

Author’s Response

Hi,

Thanks for writing to us!

There is no single source for concall transcripts. It would differ from company to company. You may check each of the following sources for the companies:

  1. Company website> investor relations
  2. BSE exchange filings
  3. Researchbytes. com

If the concall transcript is in public domain, then in all probability, you would get it from either of these three sources.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

I tried to work on your suggestions but still, I have some confusion. Please help me in understanding the ratios below.

My queries are as below.

  1. CFO is always higher than net profit in normal cases. Is it correct? When we calculate CFO, we add amortization, depreciation and finance cost with PBT. But when we calculate net profit, we subtract amortization, depreciation and finance cost.
  2. CFO lower than net profit means that cash is getting struck in working capital (inventory or trade receivables) and in some cases, higher payables may also reduce the CFO of the year. Am I correct?
  3. See the example of GSFC. Cumulative (10 Years) CFO is ₹4,367Cr and cumulative net profit ₹4,406Cr but still receivable are also high at ₹3,308Cr. How to relate all three in this case? Debtor days also very high.

Author’s Response

Hi,

Thanks for writing to us! It’s very pleasing that you are doing the hard work of interpreting the cash flow statement.

  1. It is right that normally CFO should be higher than PAT and it’s because of the reasons cited by you.
  2. It is right that CFO can be lower than PAT due to either working capital related factors or also due to high non-operating/other income, which would form part of CFI (dividend income etc.)
  3. As we have discussed CFO vs PAT for a single year, the same is true for 10 year period as well. In 10 years, the increase in receivables would reduce the CFO whereas cumulative depreciation/amortization and finance cost will increase the CFO. Rest for the real reasons, one would have to analyse the cash flow statements from the annual reports of each of the last 10 years and one would get to know the exact factors leading to a certain level of CFO.

Further reading: How to do Financial Analysis of Companies

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Sir, I have been following your website since long and based on that, I feel this is one of the best websites for learning the intricacies of stock-picking. No other website matches the quality of this website. I would like to thank you for creating this masterpiece.

On another note, if for a stock, the other income is considerably high, then there are some chances of cumulative cash flow from operations (cCFO) being lesser than cumulative net profit after tax (cPAT). In those cases, what we should do to make sure that the company is not manipulating its P&L.

Please advise.

Thank you and best regards

Author’s Response

Hi,

Thanks for your feedback! We are happy that you found the articles useful!

We appreciate that you are spending time and effort to understand the cash flow dynamics of companies, which is an important tool to understand the investibility of any company.

You are right that in the case of high other income, the CFO can be lower than the PAT. Such kind of assessment would indicate to an investor the ability of the company to generate a cash flow, which is sufficient to meet the fund’s requirements like capital expenditure (capex) or debt servicing etc.

Once an investor is able to identify that the CFO is lower due to other income, then she can take a case specific investment decision depending upon the nature & amount of non-operating income as well as the nature and amount of funding requirements like capex or debt servicing etc.

Such decisions need to be taken on a case by case basis and there would not be any specific guideline applicable to all the cases.

Further reading: 7 Steps to Find out whether a Company is Cooking its Books

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Query

Hello Sir

Every article by you is increasing the knowledge base of new investors. I find your articles more relevant and useful than reading a book of foreign writers (that too mostly written in 1960’s and has reference to USA markets).

My question is that whether one should take total outstanding shares for analysis or total authorized shares. If I understand right, then the warrants, if exercised, will be an addition to the total outstanding shares.

Also in Debt to Equity ratio: equity considered is only float equity or total outstanding equity?

Author’s Response

Hi,

Thanks for writing to us! It is nice to know that you have found the e-book useful.

1) Total outstanding shares for analysis or total authorized shares. If I understand rightly, warrants, if exercised will be an addition to the total outstanding shares.

EPS based on total outstanding shares is called Basic EPS, whereas the EPS after considering the impact of warrants etc. is called as Diluted EPS. Companies report both the EPS in their financials. It is advised that diluted EPS should be preferred for analysis.

2) Also in Debt to Equity ratio…equity considered is only float equity or total outstanding equity

We consider equity as “Shareholder’s Funds”, which includes equity as well as reserves and surplus.

Further Reading: Understanding The Annual Report Of A Company

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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