Analysis Using the Statement of Cash Flows
Read this chapter, which shows how to record cash flow from operating activities on the statement of cash flows. The chapter also provides an overview of cash flows from operating activities and steps in preparing a statement of cash flows, which will be covered in more detail in the resources that follow.
Analyzing and using the financial results-Cash flow per share of common stock, cash flow margin, and cash flow liquidity ratios
The information in the statement of cash flows provides a basis for analyzing financial results. However, further analysis is possible through the use of three ratios relating to cash flow: the cash flow per share of common stock, cash flow margin, and cash flow liquidity ratios. The ratios shown below are results for Synotech, Inc. and recent results for other companies. All dollar amounts are rounded to the nearest million.
The cash flow per share of common stock ratio is equal to the net cash provided by operations divided by the average number of shares of common stock outstanding. This ratio indicates the company's ability to pay dividends and liabilities. The higher the ratio, the greater the ability to pay. The cash flow per share of common stock ratios for the companies were:
|
Company |
Net cash provided by operating activities (millions) |
Average shares of common stock outstanding* (millions) |
Cash flow per share |
|
Synotech, Inc. |
$1,101 |
147 |
$7.49 |
|
J.C. Penney, Inc. |
1,598 |
262 |
6.1 |
|
The Walt Disney Company |
6,434 |
2,092 |
3.08 |
|
General Electric Company |
22,690 |
9,893 |
2.29 |
*To determine the average number of shares, add the beginning and ending numbers outstanding and divide by two.
The cash flow margin ratio is equal to net cash provided by operating activities divided by net sales. This ratio is a measure of a company's ability to turn sales revenue into cash. The higher the ratio, the better. The cash flow margin ratios for the companies were:
|
Company |
Net cash provided by operating activities (millions) |
Net Sales (millions) |
Cash flow Margin |
|
Synotech, Inc. |
$1,101 |
10,499 |
10.49% |
|
J.C. Penney, Inc. |
1,598 |
31,846 |
5.02% |
|
The Walt Disney Company |
6,434 |
25,402 |
25.33% |
|
General Electric Company |
22,690 |
128,051 |
17.72% |
The cash flow liquidity ratio is equal to the total of cash, marketable securities, and net cash provided by operating activities divided by current liabilities. This ratio is a test of a company’s short-term, debt-paying ability. The higher the ratio, the better. The cash flow liquidity ratios for the companies were:
|
Company |
Cash, marketable securities, |
Current |
Cash |
|
Synotech, Inc. |
$1,470 |
$2,285 |
.64 times |
|
J.C. Penney, Inc. |
2,542 |
4,235 |
.60 times |
|
The Walt Disney Company |
7,276 |
8,402 |
.87 times |
|
General Electric Company |
35,913 |
156,116 |
.23 times |
On the first of these measures, Synotech, Inc., seems to be in the strongest position, although all of the companies are financially sound. On the second measure, Walt Disney and General Electric have the highest cash flow margin ratios. On the third measure, Walt Disney seems to be in the strongest position. However, a more valid comparison on each of these measures would be made if each of these companies was compared with other companies in its industry. Dun & Bradstreet's Industry Norms and key business ratios can be used for this purpose. (This source could also be used for comparisons of ratios in the next chapter). A complete analysis using the techniques described in the next chapter would provide additional information about the strengths and weaknesses of each of these companies.