Cash Flow Analysis Framework

Financial ratios:

are commonly-understood shortcuts that help us understand particular characteristics about the financial statements of an organisation.

They are useful to draw comparisons, inferences or checking financial health of a firm.

Net Profit After Tax (NPAT) or Operating Profit

Profit = revenue - expenses

DuPont Analysis: Under DuPont analysis, return on equity (RoE) is equal to the profit margin multiplied by asset turnover multiplied by financial leverage.

Return on equity measures the rate of return on the ownership interest of a business and is irrelevant if earnings are not reinvested or distributed.

EBITDA: Earnings Before Interest Taxation Depreciation and Amortisation

Profit = Net Profit after Tax

Depreciation and Amortisation are non-cash expenses

Taxation covers Tax Rate and Organisational Performance

Interest covers Amount of Debt and Rate payable on debt

Less Depreciation and Amortisation from EBITDA gives:

EBIT

Less Ungeared tax expense (from EBIT) gives:

NOPAT - Net operating profit after ungeared (Adjusted) taxes paid

Plus Increase in net tax provisions gives:

NOPLAT - Net operating profit less ungeared (Adjusted) taxes paid

Plus Depreciation

Less Increase in net operating working capital

Plus Increase in net operating provisions

A. Equals Cash flow from operating activities

CAPEX - Capital Expenditure & Replacement of existing assets (sustaining CAPEX) & New Assets

Less Proceeds from sale of assets

B. Equals Cash flow from investing

A-B Equals Operating free cash flow

Less Debt related cash flows, after tax interest expense, debt repayments (- new borrowing),

Equals (EFCF) Equity Free Cash Flows

The value of the firm is a measurement of the estimated value of its future cashflows, less any relevant adjustments for the risks associated with investing in the firm.

Fundamental analysis: An analysis of a business with the goal of financial projections in terms of income statement, financial statements and health, management and competitive advantages, and competitors and markets.

RoE: Return on equity is equal to net income, after preferred stock dividends but before common stock dividends, divided by total shareholder equity and excluding preferred shares.

The practice of decomposing return on equity is sometimes referred to as the “DuPont System. ”

Stock prices are most strongly determined by earnings per share (EPS) as opposed to return on equity.

Earnings per share is the amount of earnings per each outstanding share of a company’s stock. EPS is equal to profit divided by the weighted average of common shares.

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.

On the other hand, retained earnings refers to the portion of net income which is retained by the corporation.

Return On Assets: Return on assets is equal to net income divided by total assets. Return on assets shows how profitable a company’s assets are in generating revenue.

Ratio of Total Assets to Sales is Capital Intensity.