A Study on Cash Flow Statement
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Name: Avinash P USN: 1NZ17MBA10 4th sem MBA Topic: A Study on cash flow statement EXECUTIVE SUMMARY EXECUTIVE SUMMARY A study on cash flow statement Value look into administration is essential to financial specialists for their speculations to acquire a greatest come back with least hazard. Each financial specialist are consider numerous parameters in determination of securities to build a decent value inquire about study on cash flow statement. The present project is on study on cash flow statement which have been done in Deal money security’s pvt Ltd. Bengaluru for a duration of 8 weeks which includes industry and company details. The company Deal money security’s pvt Ltd. is situated in Bengaluru which is engaged in the business of multi-dimensional financial services. Deal money Market Investment Advisory, a trusted name in the financial services arena, provides you with the entire gamut of financial advisory services under one ceiling. It is one of the few organizations providing research and information on Indian capital markets mainly based on Technical Analysis and enjoys a strong reputation amongst investors, brokers and researchers. Our team is highly skilled with experienced analysis. Our efforts are to provide you more & more profit in every trade. Our research is based around these services: The main purpose of doing this project is to design an optimal study on cash flow statement and suggest to a customers of Midas touch regarding proportion of investment to be made in each selected scrip using Sharpe’s single index model. Ultimately this project helps Deal money security’s pvt Ltd. to give suggestions to its company to have an optimal study on cash flow statement and make company decisions. CHAPTER -1 INTRODUCTION CHAPTER 1 INTRODUCTION 1.1 Theoretical background of the study Definitions of cash flow statement According to Indian Accounting standard (AS-3) “Cash flow means inflows and outflows of cash and cash equivalents. Cash comprises cash on hand demand deposits with banks. Cash equivalent are short-term, highly liquid investments which are readily convertible into cash.” What is the purpose of preparing cash flow statement? The statement of cash flows as its name itself implies, the company’s cash flows for a period of time. Basically it provides the answers for the following questions: From where our money did come? Where did our money go? The statement of cash flow states that how the company is generating cash for a period of time and how it is using the cash. Apart from these this thing cash flow statement is needed for the following reasons: To prepare the dividend & retention policies for management To guide the management in taking decisions about short-run obligations. To know the factors which are caused for the changes in cash flows of the company. When company creates large non-cash expenses it is needed to prepare a cash flow statement to get accurate financial position of the company. To guide the management to take remedial action in adverse situations. Categories of Cash flows In the statement of cash flows, cash receipts and payments are classified into 3 categories: Operating activities Investing activities Financing activities Operating activities: All transactions relating to a company’s delivering or producing its goods for sale and providing its services are called operating activities. The amount from these activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends repay loans and make new investments without recourse to external sources of financing. Investing activities: The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. These includes acquiring and selling of assets, acquiring and selling of investment securities, and lending money and collecting on those loans. Financing activities This is the last category of the statement of cash flows which involves obtaining resources from owners and providing them a return on their investment, and obtaining resources from creditors and repaying those borrowings are called financing activities. For example, cash proceeds from issuing shares, issuing debentures, bonds, and cash payment of amount borrowed, payment of dividend. Advantages of preparing cash flow statement It helps in measuring firm’s ability to meet its fixed charges. It is an excellent to analyse the future plans of financing It is helpful in analysing whether the company is financially healthy or not. It is useful to bring into light about the firm’s liquidity and solvency position during crisis situation. It is useful to know how the company is depended on the external source. Limitations of cash flow statement: If there is no non-cash items like depreciation, written offs etc. it is waste to prepare the cash flow statement. Non-cash transactions are ignored. It is only short-term measurement. It is before tax measurement. It does not link with the cost of capital and time value of money. Cash flow-based Financial Ratios By using the balance sheet for liquidity analysis is that it only presents data that measures where the organization stands at a exacting point in time. Like that income statement includes many non- allocations, accruals, reserves & accounting conventions that have nothing to do with cash. So by using the cash flow statements for liquidity analysis will results more dynamic picture of the resources to meet the financial obligations. Operating cash flow ratio Operating cash flow is helps to measure the liquidity of a company. If the operating cash flow is less than one, it means that the company has generated less cash in the period than it needs to pay off its short-term liabilities. Therefore, the company has to maintain a higher operating cash flow ratio. Formula net cash provided by operating activities/Net sales FCF / Sales Asset turnover ratio Similar to return on assets, but it uses the cash flow from operations instead of using net income. It shows how well the company uses its assets to generate the cash flow. Formula net cash provided by operating activities/total assets Cash generating power This ratio demonstrates the company’s ability to generate cash and the proportion of the cash generated exclusively by operations compared to the total cash inflow. The ratio indicates the dependence on external sources for financing. The larger the ratio, the more dependent a company is on external funding and this can lead to higher level of financial risk. Formula CFO / CFO + Cash Inflows of Investing + Cash Inflows of Financing External financing index ratio This ratio compares the cash flow from operating activities with cash flow from financing activities to show the dependency on external source. The larger the ratio shows higher dependency on external source. Formula- Cash from financing activities / Cash from operating activities Long term debt coverage ratio In this ratio the amount of cash flow available from operations after meeting dividend payments, will be divided by the long term debt such as mortgage notes payable, bonds payable and other significant obligations. It helps for knowing the immediate sense of whether the company can pay off the debt or not. The higher the ratio will be a safe zone and the lower will indicate the risk so that the management has to take action to raise the capital. Formula CFO – Cash dividend paid / Long term debt CFO / Long term debt Current Liability Coverage ratio The current liability coverage ratio is a liquidity measurement based on a comparison of operating cash flow with near term obligations. This ratio shows the company’s actual ability to meet the current liabilities. It also indicates the company’s ability to pay the debt and obligations coming due within the year. The larger number is better. If it drops below 1 then it means, the company is unable to pay the current liabilities. Formula CFO / Current Liabilities CFO – Dividends Paid) / Current Liabilities CFO / Short term Debt Interest coverage ratio Interest is an expense which is tax deductible. Therefore, the interest coverage ratio is computed by adding reverse to CFO the amount paid for interest and income taxes, and then dividing the result by cash paid for interest. The cash payments contain total interest paid for the short-term and long-term interest-bearing debt. A conventional times-interest-earned ratio does not offer a useful benchmark for debt service because of the non-cash items and accrual adjustments. By contrast, the interest coverage ratio with its importance on cash flows provides a more realistic indicator of liquidity and the ability of an organization to service its debt. A very low ratio signifies bigger risk that a company might not have enough cash existing to meet its obligation to pay interest on its debts. Therefore, it is important to examine and track the interest coverage ratio over time. A highly leveraged company will have a low multiple and the company with a strong balance sheet will have a high multiple. If the interest coverage ratio of the company is less than 1, the company has a high risk of default. Formula CFO + Cash Payments for Interest and Income Taxes/Cash Payments for Interest Capital expenditure ratio This ratio measures the capital available for internal reinvestment and for payment of the existing debt. When this ratio exceeds 1.0, the company has enough funds available to meet its capital investment and pay the debt requirements. The higher the value, the more spare cash the company has to service and repay debt. This ratio is vary by industry to industry.