Understanding Cash Flow Statements: Insights from Crow River Investment Club
This presentation, delivered on June 10, 2003, by the Crow River Investment Club, delves into the intricacies of cash flow statements and their vital role in assessing a company's financial health. Emphasizing the importance of cash flow over earnings, the agenda covers essential topics, such as net income, depreciation, accounts receivable, and inventory management. A detailed analysis of cash provided by operations and free cash flow is included, along with examples from Lowe's financials, demonstrating the significance of cash flow in measuring a company's capacity to enhance shareholder value.
Understanding Cash Flow Statements: Insights from Crow River Investment Club
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Presentation Transcript
The Cash Flow Statement Crow River Investment Club June 10, 2003
References • The Motley Fool Investment Workbook • A Cash Flow Statement (Lowe’s) • www.investorwords.com
Agenda • Purpose • Terms • Analysis
Purpose • Indicator of financial health of company • Considered by some experts to be a better measure than earnings • Shows the directional flow of money • Where it comes from • Where it goes
Basic Overview • Net income • Add Depreciation • Subtract non-cash assets • Add current liabilities that haven’t been paid • Result -> an understanding of cash flow
Basic Terms • Net income • From the income statement • Depreciation • Loss of value of previous purchase • Accounts receivable • What is still owed to the company • Remember -> an increase may mean the company isn’t effectively collecting for its product • Inventory • What the company still owns • Increasing inventory means the company is producing faster than it’s selling • Cash Provided by Operations • Should be positive and rising • If negative, indicates company cannot fund growth from internal means
Basic Analysis • Free Cash Flow • (Cash Provided by Operations) – (Dividends Paid) – (PP&E) • Measure the means a company has to increase shareholder value • Stock re-purchase • Debt reduction • Acquisition
CF Example - LOW Cash Flows from Operating Activities: FY02 FY01 Net Earnings $1471 $1023 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities: Depreciation and Amortization 645 534 Deferred Income Taxes 208 42 Loss on Disposition/Writedown of Assets 18 39 Tax Effect of Stock Options Exercised 29 35 Changes in Operating Assets and Liabilities: Accounts Receivable – Net (6) (5) Merchandise Inventory (357) (326) Other Operating Assets (41) (37) Accounts Payable 228 1 Employee Retirement Plans 40 114 Other Operating Liabilities 461 193 Net Cash Provided by Operating Activities 2696 1613
Additional Notes • Cash Flows from Investing Activities • Shows how company spends cash • Cash Flows from Financing Activities • Shows impact of debt reduction or issue • Shows cost of dividend payments • Cash and Cash Equivalents • Reflects same line on balance sheet
Free Cash Flow • Free Cash Flow • (Cash Provided by Operations) – (Dividends Paid) – (PP&E) • 2696 – 66 – 2362 • $268 Million in FY02
