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Cash Flow Statement Analysis - Part A

Cash Flow Analysis

(LOTH, 2020) says that cash flow statement explains how the cash is utilized by the company and from the where the cash comes i.e cash inflow and how and where it is utilized i.e. cash outflow. In case off Adairs Ltd, following is the Cash flow for last three years:-

Cash analysis

Particulars

2019

% change

2018

%Change

2017

% Change

2016

               

CASH FLOWS FROM OPERATING ACTIVITIES

             

Cash Revenue

379236

109%

347195

118%

2,93,022

106%

2,77,047

Payment to Supplier

-330437

112%

-295312

119%

-248550

106%

-235447

Interest received

77

175%

44

80%

55

68%

81

Income tax paid

-12666

111%

-11449

76%

-15152

175%

-8659

Interest paid

-1193

86%

-1387

80%

-1731

89%

-1936

IPO transaction costs paid

           

-7229

Net cash flows from operating activities

35017

90%

39091

141%

27644

116%

23857

CASH FLOWS FROM INVESTING ACTIVITIES

             

Acquisition of property, plant, equipment and intangibles

-6959

98%

-7095

63%

-11330

110%

-10324

Net cash flows used in investing activities

-6959

98%

-7095

63%

-11330

110%

-10324

CASH FLOWS FROM FINANCING ACTIVITIES

             

Drawings of borrowings

19000

           

Repayment of borrowings

-19000

112%

-17000

       

Payment of borrowing costs

-50

   

0%

-89

   

Dividends paid

-24052

145%

-16587

100%

-16588

200%

-8294

Net cash flows used in financing activities

-24102

72%

-33587

202%

-16588

200%

-8294

Net increase in cash and cash equivalents

3956

-249%

-1591

438%

-363

-7%

5239

Cash and cash equivalents at beginning of the period

12718

89%

14313

98%

14676

156%

9437

CASH AND CASH EQUIVALENTS AT END OF PERIOD

16708

131%

12718

89%

14313

98%

14676

It can be seen that company is growing in term so sales growth and it is also reflected in its cash flow statement, cash inflow from operations are also growing i.e. from 347,195 in 2018 to 379,236.But Net cash flow from operation has also decreased, i.e. 39,091in 2018 to 35,017 to 2019. From the table above it can be seen that income tax outflow payment has increased by 11% from 2018 to 2019 but has reduced from year 2017and major fall can be seen in Net Cash flow from operation i.e 90% in 2019 , where as it was 141% in 2018 from 2017. No major change has come in Asset cash inflow , Cash dividend were paid in 2019 which is higher by 45% more cash outflow than in 2018.

Which shows from cash outflow of payments are made are on higher side. It can be represented as shown in the graph

The main components of cash flow is cash from operation, cash flow from financing and cash from investing activities. Accounting methods of accounting is also cash and accrual accounting. (https://www.fundera.com/, 2020) suggest that If a company is in a highly volatile industry or suffering cash issues, they should do cash flow analysis more often otherwise it can be done by whatever time period a company may choose generally four weeks or one month is a reasonable time period .

Cash Flow Statement Analysis - Part B

Calculation of Ratios:-

Ratios

Formulae

Unit

2019

2018

2017

2016

Return on equity

=Profit After Tax/ Equity

in %

25%

26%

21%

27%

Operating Profit Margin

=Operating Profit/ Sales

in %

9%

10%

8%

10%

Inventories turnover period

=COGS/Average inventory

No days

4

4

4

 

Current ratio

=Current Assets/ Current Liabilities

Times

1.48

1.59

1.62

1.66

Debt to assets ratio

=Debt/ Asset

Times

0.12

0.13

0.22

0.23

Interest cover ratio

=EBIT / Interest

Times

35.12

30.40

15.83

19.56

Data used to calculate above ratios as taken from the annual reports 2017, 2019:-

Particulars

   

2019

2018

2017

2016

Sales

 

in $

344430

314769

264964

253182

EBITA

 

in $

43446

45261

30812

39231

PAT

 

in $

29643

30561

21017

26143

Inventory

 

in $

42,782

33,568

32,992

26,272

Average Inventory

(Opening + Closing) /2

in $

38,175

33,280

29,632

 

Debt

 

in $

24,999

24,999

41,955

41,921

Shareholder's Equity

 

in $

1,18,317

1,16,180

1,00,312

95,590

Assets

 

in $

2,10,274

1,94,993

1,92,681

1,83,678

Current Assets

 

in $

68,708

54,451

51,793

47,547

Current liabilities

 

in $

46,567

34,140

32,022

28,575

Interest

 

in $

1237

1489

1946

2006

COGS

 

in $

1,47,306

1,25,119

1,08,163

98,863

Source of Formulae: https://www.edupristine.com/blog/ratio-analysis-ratios-formulae

(ratio-analysis-ratios-formulae , n.d.)

Cash Flow Statement Analysis - Part C

Working Capital Management Analysis

(Trisha, n.d.) Describes the working capital is the difference between current assets

and current liabilities. Where Current assets includes cash, accounts receivable, inventory etc. And Current liabilities are account payable and other minor liabilities if any.

Following is the data for working capital Calculation of 3 years

Cash conversion Cycle = DIO (Days inventory outstanding) + DSO (Days sales outstanding) – DPO (Days payable outstanding)

   

2019

2018

2017

2016

Current Assets

in $

68,708

54,451

51,793

47,547

Current liabilities

in $

46,567

34,140

32,022

28,575

Working Capital

 

22,141

20,311

19,771

18,972

CCC

 

-37

-42

-37

 

DSO

 

0

0

0

 

DIO

 

4

4

4

 

DIP

 

41

46

41

 

 

Current ratio

=Current Assets/ Current Liabilities

Times

1.48

1.59

1.62

1.66

Working capital management is the practice and technique to control all item of current assets and liabilities to keep the working capital requirement to a minimum level so that the cost of capital can also be reduced, but it should be too low also which might create a liquidity deficiency situation so there has to be ideal situation which generally is Current Ratio or working capital ratio 2:1

From the above calculation it can be seen CCC in this case is – negative , Adair is a retail company So the debtors or trade receivable is almost negligible and companies supplier are get paid just like in any other industry . So the company is cash rich company and there is no issue of working capital, though the trend is that is increasing from year to year i.e. 18972 in 2016 to 22141 in 2019.

Current ratio is 1.66 in 2016 and has come down to 1.48 time again the trend is that it is following, so it shows that there is some issue as far as the management of cash is concerned though the company has very less inventory only for 4 days and Debtors for 0 days. But still company has not achieved the ideal ratio of 2:1. But again it is also important to see that 90% of the current Assets are quick liquid assets, so if company calculated Quick ratio it will surely be more than 1:1. That makes the company safe in terms of liquidity.

Cash Flow Statement Analysis - Part D

Ratio Analysis

Ratio analysis is the popular technique used by business analyst to measure the financial health or performance of the company. Various business financial ratios of the company is indicator of that how well the company is performing in terms of different variables against its previous years of industry standards or may be peer or competitors companies.

The ratio are of different and categorised four categories:-

Profitability Ratio- Profitability ratio helps in measuring the its ability to earn profit and here in this case Return on Equity, operating profit ratio are the profitability ratio calculated for the last 4 years , and it is observed that Return on Equity is ranging between 21% to 27% and in current year it is 25% shows that company has ability to give returns to its shareholders, and from investors perspective it is profitable. Same way Operating Profit margin is also 8% to 10% which is again a positive sign and treated as good % and no major descripency is observed in these four year from 2016-2019 So there is consistency.

Solvency Ratio – it shows that how much solvent a company is in terms of liquidity and if there is a situation to payback their liability how quickly the creditors can expect their payment. To measure this the Current Ratio is calculated and is shown that it is somewhere between 1.5 on an average for these years and again consistency is maintained. For retail company like this it is ok to have this ratio between this ranges.

Leverage/Gearing Ratio – Debt to Asset Ratio and interest coverage ratio are ratio considered in the category of gearing ratio, this is again to see long term repayment capability of the company, that whether the company is able to earn the profit to cover its financial expense i.e. cost of capital. And Debt to Asset ratio is to see that assets of companies are enough to recover its debt, in case it is no even 20% and again ranging 12% to 13% for last two years again a healthy sign.

Efficiency Ratio – Efficiency ratio show that how the company’s turnover is in terms of debtors, inventory, assets etc. Inventory Turnover is 4 days which is quite efficient number to show working capital blockage in inventory is very less.

(Annual Report, n.d.) Data is taken from the balance sheet, income statement and cash flow to calculate various ratios, other than above ratios there are few more has been the part of Annual report to show the financial performance of the Adair Ltd.,

year

2019

2018

2017

2016

2015

Sales ($'000)

344430

314769

264964

253182

210878

EBIT ($000)

43446

45261

30812

39231

33137

Net profit before tax

42286

43816

28921

38823

31409

Net profit After tax

29643

30561

21017

26143

21986

Share price at the end of year(in $)

1.42

2.23

0.86

2.49

2.78

Dividend paid per share

14.50%

13.50%

8%

11.5%

0

Earnings per share

18%

18%

13%

16%

15%

           

PAT /Sales = Return on sales

9%

10%

8%

10%

10%

If above table is analysed further for dividend and capital structure of the company in recent times than as per report itself, there is no major changes in structure in FY 2019. The overall debt facility remains at $50 mn in aggregate which represents a $48.75 mn revolving cash advance (term facility) drawn to $25 mn by year end. The Adair Ltd.,‘s debt equity ratio , fixed coverage ratio and leverage ratio are three important covenants of the debt facility. 

Dividends – As declared in the annual report 2019, an interim dividend of 6.5 cents /share was paid to the holders of fully paid ordinary shares on April 2019 and the directors also have declared a final dividend of 8.0 cents/share. It can also be seen from the table above that company is paying its shareholder regularly and it is growing year on year except in 2018.

Operating and Financial Review 2019 - The profit after income tax amounted to $29.6 million (2018: $30.6 million). The EBIT of the Company for FY2019 was $43.4 million (2018: EBIT $45.3 million).

2017

2018

2019

Market price per share (financial year end)

$0.86

$2.23

$1.42

Average settlement period for debtors (days)

0.00

0.00

0.00

EPS

$0.127

$0.184

$0.179

Acid-test ratio (times)

0.48

0.48

0.46

Dividends per share (interim + final)

$0.080

$0.135

$0.145

Gross profit margin

59.18%

60.25%

57.23%

P/E ratio (times)

6.77

12.12

7.93

Sales revenue to capital employed (times)

1.68

1.96

2.12

Return on capital employed

19.55%

28.18%

26.82%

Average settlement period for creditors (days)

41.77

46.31

41.72

References for Adairs Limited Analysis

(2020). Retrieved from https://www.fundera.com/: https://www.fundera.com/blog/the-ultimate-guide-to-cash-flow-analysis#:~:text=Cash%20flow%20analysis%20is%20a,have%20at%20any%20given%20time

Annual Report. (n.d.). Retrieved from https://www.adairs.com.au/: https://www.adairs.com.au/

LOTH, I. (2020, August). articles/stocks/07/easycashflow.asp. Retrieved from https://www.investopedia.com: https://www.investopedia.com/articles/stocks/07/easycashflow.asp

ratio-analysis-ratios-formulae . (n.d.). Retrieved from https://www.edupristine.com/blog/ratio-analysis-ratios-formulae : https://www.edupristine.com/blog/ratio-analysis-ratios-formulae

Trisha. (n.d.). 4-main-components-of-working-capital-explained. Retrieved from https://www.yourarticlelibrary.com: https://www.yourarticlelibrary.com/financial-management/working-capital/4-main-components-of-working-capital-explained/44117

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