Understanding Cash Flow from Operating Activities (CFO)

Modified: 03-Jul-20

The current article covers the step-by-step calculation of cash flow from operations (CFO) from net profits (PAT) of a company.

In addition the article covers responses to the common queries asked by readers about CFO:

  • How to calculate changes in trade receivables/payables for the cash flow statement?
  • Can we compare cumulative EBITDA (instead of cumulative PAT) with cumulative CFO to decide whether a company is converting its profits into cash?
  • Can companies arbitrarily add depreciation in CFO calculation to inflate CFO?
  • Can Dividend & Interest Income be a part of cash flow from operations (CFO) instead of cash flow from investing (CFI)?
  • Can inventory losses (write-down) lead to inflated cash flow from operations (CFO)?
  • Why is the amount of dividend declared in a financial year in the director’s report section of the annual report different than the amount of dividend payment shown as outflow in the cash flow statement?
  • Can we find the amount of capital work in progress (CWIP) and the amount of capitalized interest from cash flow statement?

 

Step-by-Step Calculation of Cash Flow from Operating Activities (CFO) from PAT

Let us see the steps used in the calculation of cash flow from operations from the profits of the company by taking examples of a sample case.

Vinati Organics Ltd Cash Flow From Operations 2016

 

1) Depreciation of ₹18.43 cr is added along with amortisation: It creates a cash inflow in the statement, though practically it has no impact on cash generation.

Depreciation expense like amortisation is a non-cash expense. It is the adjustment of cash outflows, which happened in the past while creating fixed assets (plants, machinery etc.). At the time of creation of plants, the cash outflow took place but the same was not deducted from the P&L as it was directly put on the balance sheet under fixed assets. The depreciation expense is the deduction of those past cash outflows from the P&L now. It is effectively to match the expense deduction of the cost of plants with the revenue being generated by them now.

Further Reading: Capitalization of Interest, Fixed Asset Turnover

As mentioned above, in the case of depreciation, the cash outflow has already happened in the past and now there is no cash outflow. However, the PAT of the company has been arrived at after deduction of depreciation (no cash outflow). Therefore, to derive at the actual cash position of the company from PAT/PBT, we add back the depreciation. Otherwise, the cashflow from operations (CFO) calculation will be erroneously lower whereas we will find that the company has excess cash, which is not accounted for.

 

2) Interest paid is ₹3.25 cr.: It is added as cash inflow for CFO, whereas it is actually a cash outflow from the company.

Interest paid/expense is added back in PBT as it is a financing item and therefore it should not reduce the CFO. We add the interest paid in PBT to arrive at CFO and the same interest paid is deducted as a cash outflow from financing in CFF. This is a mere reclassification of interest expense from CFO to CFF

 

3) Provision for the expense is also added in CFO: whereas it is a non-cash expense.

Provision are a non-cash expense, where a company believes that it might have to pay something in future and therefore it recognises those expenses in P&L today itself. The cash outflow might not have happened in the current year.

Therefore, just like in the case of depreciation, provisions, which are non-cash expenses, are added back to derive cashflow from operations (CFO) from PBT or PAT.

 

4) Interest and dividend incomes are deducted: actually, these are cash inflows to the company.

Interest income and dividend income are deducted from PAT/PBT to derive CFO as these are income from financial investments. Therefore, they are removed from cashflow from operations (CFO) calculation and are put under cash inflow from investing (CFI).

 

5) Export incentives are deducted to arrive at CFO.

Export incentives: The export incentives, which are deducted are “Unrealized export incentives”. It indicates that the company is eligible to receive these incentives and therefore, they are included in the profits of the current year. But as they are still unrealized meaning that the cash is yet to be received, therefore, they are deducted while deriving CFO.

This transaction of deduction of unrealized export incentives is the exact opposite of depreciation. In depreciation, a non-cash expense is added back to calculate CFO. In unrealized export incentives, a non-cash profit/income is deducted to calculate cashflow from operations (CFO).

 

6) Trade and other receivables of ₹10.98 cr are deducted in FY15.

The increase in trade receivables is deducted to calculate the CFO for FY2015. Conceptually, Increase in receivables means that if hypothetically in FY2014 the amount to be collected from customers was e.g. Rs. 100cr. and in FY2015, the amount to be collected has increased to e.g. Rs. 150 cr., this effectively means that cash of Rs. 50 cr. (150-100) has gone out of the company to its customers, which it needs to collect.

As it is equivalent to cash outflow, therefore, it is deducted from profits to arrive at CFO. On the contrary, if the trade receivables would have declined from Rs. 150 cr to Rs. 100 cr during the year, then it would have been added in the CFO as it would have meant that the customers have made the payments and the money had come in the company.

 

7) Inventory is deducted in FY2015: It is not understood

The increase in inventory in FY2015 is deducted to calculate CFO. The concept of inventory adjustment is similar to receivables adjustment. Hypothetically, if in FY2014 the inventory with the company was e.g. Rs. 100cr. and in FY2015, the inventory has increased to e.g. Rs. 150 cr., this effectively means that cash of Rs. 50 cr. (150-100) has gone out of the company to vendors (inventory suppliers), which is deducted to arrive at CFO.

Similarly, if the value of inventory would have declined over the year, then the amount would have been added to show as an inflow to the company.

 

8) Dividend received of ₹4.40 cr is added, which is exactly the same that of the above (which was deducted from CFO). Net increase/decrease in cash and cash equivalents (A + B + C): if we add (+) and (-) dividend income and interest paid ₹3.25 cr then the net impact will be 0.

Dividend received is added in cash flow from investing as per the concept explained above while answering 4.

 

Important note about mismatch in the figures derived from the balance sheet and the figures in the cash flow statement:

In routine business, there are many transactions, which require subjective assessment whether they fall under operating or investing or financing, or under current or non-current section. Therefore, investors would find that many times, the data derived from the changes in the balance sheet will only approximately match the figures in the cash flow statement. In case, the difference is large, then the investor may contact the company directly for clarifications.

Hope it answers your queries.

Also Read: How Companies Manipulate Cash Flow from Operating Activities (CFO)

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Cumulative cash flow from operations (cCFO) vs cumulative net profits (cPAT)

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

Related 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

 

Can we compare cumulative EBITDA (instead of cumulative PAT) with cumulative CFO to decide whether a company is converting its profits into cash?

Dear Vijay,

I have one question related to comparing cumulative cash flow from operations (cCFO) to cumulative net profit after tax (cPAT). Consider a small company that operates in cash only and has only one asset, which is depreciating every year. Then, in this case, cPAT will always remain lower than cCFO. I believe that it will misguide the comparison. Because there are few other non-operating expenses that would always keep this difference. Here the company did not require any cash as its dealing in cash only.

My question is how can you remove this variance in order to compare cCFO to cPAT?

Below is a snapshot of an example I am talking about. Here, the company’s cash is increasing and does not require any loans to fund its growth. However, if we go through the comparison of cPAT vs cCFO, then we could conclude that the company is bad at converting their profit into cash. However, it is 100% converting its PAT into cash.

Sample P&L, Balance Sheet And Cash Flow Statement

One correction in the above pic is for year 2 the CFO is 5 and not 10 and cCFO will be 15 and even net profit is -15 for year 1 and cPAT will be -25.

This is a simple example. Here, I have assumed that the company does the same-day purchase and sales. Therefore, there is no credit purchase or credit sales. Hence, the company is accumulating cash as it can be seen from the year-to-year comparison. However, the depreciation is higher and hence resulting in net loss. This is all that I have assumed.

Therefore, my query is how to avoid such situations as there could be multiple scenarios where this could happen like finance expenses etc. I hope you got my query.

Well, my point here is simply that comparing cPAT with cCFO will not yield any conclusive evidence whether the company has been able to convert its profit into cash. An investor needs to deep dive into it.

Secondly, I have also assumed in my example that the plant was purchased and in the same year, operations were started. Therefore, on an overall basis, this company would never match cPAT with cCFO.

Therefore, can we instead compare cumulative earnings before interest, tax, depreciation & amortization (cEBITDA) to cCFO as this would be a better view I believe.

If you apply this concept in my example, then you will come to know that the company has been converting its profit fully into cash.

Let me know if you agree with me.

 

Author’s Response:

Hi,

Thanks for writing to us and elaborating on your query with clarifications.

In the case cited by you, the cumulative cash flow from operations (cCFO) will be higher than the cumulative net profit after tax (cPAT). The reason for the same is high depreciation, which has resulted in net losses. You may read further about the factors that may lead to CFO higher than PAT and the factors that may lead to CFO lower than PAT in the following article, which shows step-by-step calculation of CFO from PAT: Understanding Cash Flow from Operations (CFO)

We believe that an investor should always keep in mind that an investment decision is a result of a comprehensive analysis that includes assessment of PAT as well as CFO. An investor should not be biased by good performance on either PAT or CFO alone. A company should have good performance on PAT and the PAT should have been converted into CFO.

Regarding PAT being negative due to depreciation, an investor should remember that the depreciation is nothing but the deferred recognition of expenses done by the company on plant & machinery. The company spent money on plant & machinery in the past but it did not deduct these expenses in the profit & loss statement (P&L) as an expense when it constructed the plant.

Therefore, in a manner, in the past, when the company was spending to construct the plant, its profits were overstated because the money spent was not deducted as expense. Whereas now, when the plant is complete, the profits are understated because the prior expense of plant creation is being deducted as depreciation even though there is no current cash outflow due to plant creation.

However, this is how the concept of capitalization operates. You may read more about how investors should understand capitalization in the following article: Understand Capitalization of Interest and Other Expenses

As mentioned earlier, we do not attempt to take our final investment decision by looking at CFO alone and therefore, we would request investors to look at PAT, CFO as well as all other parameters of the following checklist before making any final investment decision about any company. Final Checklist for Buying Stocks

Moreover, investing & finance allows investors to use their preferred ratios and even tweak them to make their own custom ratios. We advise investors to keep experimenting with different ratios and use the ones, which they find to give good results. At end of the day, none of these ratios is an end in themselves.

As mentioned earlier in the case of PAT and CFO, in case of EBITDA vs CFO as well there are challenges like those that EBITDA is pre-tax number and CFO is post-tax number.

Therefore, we advise readers to use the ratios that they feel comfortable about and more importantly do not overly focus on any one ratio. A comprehensive analysis of all the aspects is important before taking a final investment decision.

Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

All the best for your investing journey!

Dr. Vijay Malik

 

Why we compare CFO with PAT and not with Sales Revenue

Hello Vijay,

I know it is very basic question but could you please explain me:

Why we are considering CFO vs PAT? Why not Sales vs the money received from customer?

We receive money from customer against our sales not against profit then why we are comparing PAT vs CFO?

What is CFO?

As per your statement, the money is received from customer, which means that we receive money against our sales then why we are comparing PAT that is only the profit.

I know I am confused a lot so please explain me to calculate CFO.

Also please explain, suppose company sold 1000 INR worth of product but company not received the amount from customer, is it still include in operating profit and net profit?

Thank you for your help and knowledge sharing.

Author’s Response:

Hi,

Thanks for writing to me!

We compare CFO to PAT, as the CFO just like PAT is after deduction of all the expenses incurred to earn the profits like: cost of raw material, employee salaries, advertisement expenses, fuel expenses etc. You can notice in CFO calculation in any annual report that it is calculated from PAT/PBT.

Read: Understanding the Annual Report of a Company

Comparing CFO to Sales would be comparing apples to oranges.

Hope it help in resolution of your query!

Regards,

Vijay

 

How to calculate changes in trade receivables/payables for the cash flow statement?

Dear Doctor,

I have a doubt on Fund Flow Analysis. While analyzing the balance sheet with respect to cash flow statement, the amount seems to be a bit different. Could you please assist me?

The change in the trade receivables, as well as trade payables in the balance sheet, is many times different from the changes mentioned in the cash flow statement.

Regards,

Author’s Response:

Hi,

Thanks for writing to us!

In the cash flow statement, many times, companies club the trade receivables and trade payables with certain other items under current assets and current liabilities respectively. Therefore, many times, investors would notice that the figures of changes in only “Trade receivables” and “Trade Payables” are not matching with the figures in cash flow statement.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Moreover, you would notice that in the cash flow statement, the companies have started labeling these items as “Trade and other receivables” and “Trade and other payables”.

In the “Trade and other receivables”, most of the times, the items under “Short-term loans & advances” (STLA) are clubbed. You may go through the details of the items under “Short-term loans & advances” (excluding the changes in the tax-related items under STLA) and try to club their changes with trade receivables and in most of the cases, you would be able to approximate/tally it with the figures in the cash flow statement.

Similarly, in case of “Trade and other payables”, many times, companies club other items under current liabilities, especially from section “Other current liabilities” and provisions along with trade payables. Therefore, there are differences in the changes in the “Trade payables” in the balance sheet and the cash flow statement. You may study the items under “Other current liabilities” and “provisions” and see their changes. They will provide you the explanation for the differences observed by you.

Hope it will resolve your queries.

All the best for your investing journey!

Regards,

Dr. Vijay Malik

 

Can companies arbitrarily add depreciation in CFO calculation to inflate CFO?

Hi Sir,

I have a general query.

In cash flow from operations (CFO), we know that we have to add back the depreciation to know the cash flow. However, I saw cases where some companies arbitrarily add a huge amount of depreciation, which misleads the actual net cash flow from operations.

Sir, how can we assess the actual depreciation and at which level?

Regards,

Author’s Response:

Hi,

Thanks for writing to us!

An investor may get further details about the amount of depreciation by reading:

  • The detailed schedule to financial statements contains details of fixed assets in the annual report.
  • Moreover, the companies also disclose the assumption of life of different assets in the “key accounting policies” section in the annual report.

An investor may get little bit more insights about the depreciation from combining the learning from the above two sections of annual report. However, if still investor has doubts about the amount of depreciation, then she may contact the company directly for clarifications.

Advised reading: How should investors contact Companies/Management for clarifications or additional information?

All the best for your investing journey!

Regards,

Dr. Vijay Malik

 

Can Dividend & Interest Income be a part of cash flow from operations (CFO) instead of cash flow from investing (CFI)?

Hello Sir,

Recently I am reading a book, Creative Cash Flow Reporting by Charles W Mulford. On page: 15, it states that

“Any income generated by those investments, such as cash revenue less cash expenses on investments in property, plant, and equipment, interest income on investments in debt securities, or dividend income on investments in equity securities, is included in the calculation of operating cash flow”

We have learnt so far that any dividend income on investment is considered in Cash flow from investing (CFI), but this book contradicts here.

Kindly suggest.

Author’s Response:

Hi,

Thanks for writing to us!

As rightly mentioned by you, our understanding is the same that dividend income, interest income etc. are non-operating income and therefore, excluded while calculating cash flow from operations (CFO). Such income is included in cash flow from investing (CFI).

The only situation where such income (dividend and income) are included in CFO is for the companies whose main business is making investments like investment funds/NBFCs etc. This is because dividend and interest income is the operating revenue for them.

We do not have any views on why the said book has mentioned that dividend and interest income are included in CFO. You may read more about this topic in the said book. Probably reading more will provide you the context in which the author has made this statement.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Treatment of Profits from sale of investment in Cash Flow from Operations

Hi,

I am trying to discuss Krishna Kumar’s question in the following article:

Readers’ Queries: DHFL, KRBL, HMVL, Shilpi Cables & Others

(I may be completely wrong here because I am from non-finance background and hence have very limited knowledge.)

The way I would reason why interest and depreciation are added back is something like this:

  1. First the company earns operating profit (OP).
  2. From that they set aside money for meeting debt obligations (interest and principal repayments), money for replacing machinery (depreciation- I have over simplified it a lot here), taxes, dividends and any others.
  3. So CFO should be ideally close to OP. if you look at the Cash Flow statement, CFO starts with adding back things to PBT. (I guess the P/L, BS and CF statements follow some accounting standards and that is what tweaks the picture a lot. Again I am guessing the auditing guys use some ledger entries to decide where each entry should go like CFO or CFF).
  4. The part that always trips me is the fixed assets and investments. For e.g. look at the Cash flow statement of MUL in this article. Sale of Fixed assets: there is one entry that goes into CFO and one goes into CFF. Same is the case for Interest income which appears once in CFO and once in CFF. (The nature of the expense as differentiated by ledger entries decides which fixed assets go where? I don’t know. )

The way I look at CFO is: I try to see how close or far CFO is from OP. Again I am just a beginner, so you can completely ignore my reasoning

Author’s Response:

Hi,

Thanks for sharing your valuable inputs. I appreciate the time and effort spent by you while sharing your feedback with the readers and the author.

If you notice that in MUL’s cash flow statement, sale of investments is shown as part of CFO as well as CFI. The reason is that profit from sale of investments has been included in calculation of PAT, whereas the sale of investment is not an operating activity, therefore, this profit has been deducted (negative entry) from PAT while arriving at CFO. As sale or purchase of investments is investing activity, the entire sum received from sale of investment is shown as part of inflow (positive entry) under CFI.

Similarly, income from interest on the investments, which is included in the PAT, has been deducted to arrive at CFO as the interest income is not an operating income but an investment income. The same has been included in the CFI segment as a positive entry.

Hope it clarifies your query.

All the best for your investing journey!

Regards,

Vijay

 

Treatment of financial / interest expenses in cash flow statement

Read: Analysis – Premco Global Limited

Dear Dr. Vijay,

Thank you so much for all the wonderful analysis and in fact the whole website. I have learnt more in the last week reading your blog than what I learnt (and apply) during MBA days. I have read most of the articles and now feel much more confident on stock investing. My perspective has changed totally. For instance, Premco has been on my radar for many months now. I watch the stock price every week to see when I can buy. Now, I have done a detailed analysis and feel much more confident on my decision.

I have one question on Premco Global.

I noticed in the cash flow statement, they have a line item called “Financial Expenses.” This particular line item appears both in CFO (as a positive figure) and CFF (as a negative figure). They have been consistently doing this from beginning. Mathematically, it seems like nullifying effect.

Just wanted to make sure this is not some accounting gimmick. I want to understand if this is “conceptually” correct. This reconciles correctly in the P&L as Finance expenses, though. So wanted to get your views.

Many thanks again for all your efforts.

Author’s Response:

Hi,

Thanks for your feedback & appreciation! I am happy that you found the articles useful!

Financial charges pertain to financial activities, therefore, these pertain to cash flow from financing activities (CFF). An investor would appreciate that companies need to deduct financial charges from profits before arriving at net profit after tax (PAT).

As a result, while calculating cash flow from operations (CFO) from PAT/PBT, financial charges are added back to PAT (positive entry) and are deducted from CFF (outflow/negative entry) to classify them correctly in the cash flow statement.

Read: Understanding the Annual Report Of A Company

Hope this clarifies your query!

Regards,

Vijay

 

Can inventory losses (write-down) lead to inflated cash flow from operations (CFO)?

Hello sir,

I understand that while calculating cash flow from operations (CFO), we adjust for the working capital (WC) changes to arrive at CFO.

While analysing the CFO calculation of a commodity type business, I saw that the changes in the inventory led to addition of a large amount of inflow in CFO and thus heavily inflated the CFO.

The company in question uses commodity as raw material (RM). The raw material/inventory was valued at very high prices last financial year inventory closing as the commodity was at its cyclical peak. However, in the recent year commodity prices has corrected to very lows (recent year inventory values). Therefore, the value of inventory at the end of the year has come down significantly. I understand that while adjusting for the working capital in CFO calculation, the reduction in the value of inventory on the balance sheet during a year is shown as cash inflow.

Therefore, I feel that the losses in the inventory held by the company due to decline in the price of the commodity have the potential of inflating the CFO.

So while analysing the fund flow analysis from the balance sheet or cash flow analysis, how should we consider such changes, which may not be real?

Author’s Response:

Hi,

Thanks for writing to us!

We believe that in such cases of inventory write-down only a case to case based awareness is sufficient for investors and no change to the general method of CFO calculation is needed.

Let us see the impacts on both the balance sheet fund flow analysis as well as the cash flow from operations (CFO) calculation in the case of inventory write-down.

1) Calculation of cash flow from operations (CFO):

The positive entry of change in inventory in the CFO calculation under working capital changes nullifies the impact of loss recognised in the P&L due to inventory write down. This positive entry in CFO does not inflate CFO but cancels out the impact of reduction from loss due to inventory write down in the profits.

If we do not add the positive change due to reduction of inventory in CFO, then the CFO will be unduly reduced from inventory write-down losses (which is a non-cash item).

2) Fund flow analysis from the balance sheet:

The decline in inventory will be factored in profit & loss statement as a loss/expense, which will reduce the profits and in turn will reduce the retained earnings (shareholders equity).

If we ignore all other transactions, then in the fund flow analysis, the fund inflow due to decline in asset (inventory) will be matched with fund outflow due to decline in shareholders’ equity (reduction in retained earnings due to loss in P&L because of inventory write down).

Hope it answers your queries.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Why is the amount of dividend declared in a financial year shown in the director’s report section different than the amount of dividend payment shown as outflow in the cash flow statement?

Hi Dr Vijay,

Trust you are doing great.

I have a doubt regarding a company that I am analysing.

In a particular year (FY2005), this company’s director’s report mentioned that they declared a dividend of ₹1/share on 30 lac shares It means an outflow of ₹34 lacs including dividend distribution tax (DDT). However, the same year’s cash flow statement shows only an outflow for dividend plus DDT of ₹17 lac in the cash flow from financing activities.

How did this difference arise?

In addition, in the next year (FY2006) they declared the same dividend amount and correctly showed an outflow in CFF as ₹34 lacs.

Regards,

Author’s Response:

Hi,

Thanks for writing to us!

The cash flow statement contains the amount of dividend paid in cash during the year. If out of total dividend of ₹ 1, ₹ 0.50 is paid as interim dividend within the financial year (e.g. FY2005). Moreover, the balance ₹0.50 is declared as final dividend, which will be paid out in next year i.e. FY2006 after approval in AGM, then the cash flow statement for FY2005 will have cash outflow only for the interim dividend and not for final dividend.

In the next year i.e. FY2006, the cash flow statement in the cash flow from financing section will contain the outflow for the final dividend of FY2005, which is paid after AGM in FY2006 and the outflow for any interim dividend for FY2006, which is declared and paid within FY2006.

Hope it will help.

All the best for your investing journey!

Regards,

Dr. Vijay Malik

 

Related Query

Sir, I have a query regarding dividend paid out and interest paid.

I came across a situation where dividend paid out in balanced sheet (reserves and capital Note) and dividend paid out in cash flow statement (CFF) with different set of numbers. So, to find out dividend per share which set of numbers should be used? Similar for interest paid out?

Author’s Response:

Hi,

Thanks for writing to me!

You may find different numbers for dividend paid out as the number in cash flow statement includes all the dividends paid out during the year, whereas the number in the balance sheet might include only the dividend which remains to be paid out at the balance sheet date (March 31) and for which provisions have been done.

For interest, you should take the number from the cash flow statement as this includes the entire interest outgo during the year. Whereas the number in the P&L is only the amount of interest which is expensed during the year and excludes the interest which is capitalized during the year in the form of fixed assets or WIP. However, it is best to calculate the interest outgo on your own by taking average of the debt outstanding at the start and the end of the year and by assuming a reasonable applicable rate as many a times companies do not give the actual interest data in either P&L or CF statement.

Read: Understanding the Annual Report Of A Company

Hope it clarifies your queries!

All the best for your investing journey!

Regards

Vijay

 

Can we find the amount of capital work in progress (CWIP) and the amount of capitalized interest from cash flow statement?

Dear Sir,

I have two queries:

  1. While analysing the cash flow statement, how can we find what is the total amount of capital work in progress (CWIP) and where is it adjusted? This is because the capital work in progress might be in form of inventory, plants, etc.
  2. In addition, if any company is capitalising interest cost, can we find it in the cash flow statement?

Author’s Response:

Hi,

Thanks for writing to us!

Capital work in progress (CWIP) is a part of fixed assets. It constitutes those fixed assets, which are still under construction. Inventory is not classified under CWIP. Please note that the inventory, which is under process is classified under current assets >> inventory >> WIP.

The money spent on CWIP along with fixed assets is shown as an outflow in the cash flow from investing (CFI) under headings similar to: “Purchase of Fixed Assets”.

We have experienced that it is difficult to find out the exact amount of capitalization of interest from the cash flow statement. This is because companies show a lot of capitalized interest as part of outflow under “Purchase of fixed assets” under CFI instead showing it as a part of outflow in “Interest outflow” under cash flow from financing (CFF).

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Should we invest in Companies making Cash Losses?

Hi doc,

Today, I saw some scripts which are not good in their fundamentals like

Tata Metaliks Limited. The cash flow from operations (CFO) is negative in multiple years in the last ten year. Same is the case of Asian Granito Limited.

But these companies still manage to give multi-bagger results almost seven times within a year. So imaan dagmagane lagta hai.

Actually, CFO is the main factor to analysis as I have learned from you. So what should I do?

Should I invest in such type of companies, which produce almost nil or negative cash flow from operations (CFO) not only one but multiple in multiple years but still their share price increases multiple times within a year?

Please explain. Thanks

Author’s Response:

Hi,

Thanks for writing to us!

There are multiple approaches used by market participants to decide about the stocks which they would buy or sell. Our approach “Peaceful Investing” is one of such approaches.

If an investor believes that the stocks, which even though they do not have good fundamentals would give her good returns in future, then she can choose to follow her conviction.

However, stocks with weak fundamentals do not fit in our “Peaceful Investing” model and therefore, we tend to avoid them.

Read: Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks

Hope it answers your concerns.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

When cash inflow from operations is equal to cash outflow from investing activities

In cash flow, many times we notice that the difference between cash flow from operation and the cash from investing is getting tallied or it is being met from cash flow from financing. Does it mean that the company is using all the cash from operation for investments?

Author’s Response:

Hi,

Thanks for writing to us!

The money is fungible, which means that it might be that finance is being used for investments and operations are being used partly for investment and partly to repay the finance.

Or both operations and finance are being used for investments.

But overall, if CFO inflow and CFF inflow are equal to CFI outflow that would mean that CFI requirements are being met through using both CFO and CFF.

Read: How to do Financial Analysis of Companies

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 except Vinati Organics, in my portfolio.

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The objective of “Peaceful Investing” approach is the selection of such stocks, where once an investor has put in her money, then she may sleep peacefully. Therefore, if later on, the stock prices increase, then the investor is happy as she is now wealthier. On the contrary, if the stock prices decline, even then the investor is happy as she can now buy more quantity of the selected fundamentally good stocks.

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