Operating Cash Flow --> Use which one

[snowballwisdom]

   

Hi all, may I know usually when we looking at cash flow of a company,

usually people look at A, B or C?

A -> Operating CF before movements in working capital
B -> Cash generated from operating activities
C -> Net cash generated from operating activities

[weijian]

hi snowballwisdom,

We should be looking at ©. But from your screenshot, it seems like this company does not put the "interest charges" under the operating segment (but the interest received is) and so you need to go to the financing section and account for it.

Also from what I have experienced, to get a good picture of the operating cashflow, one also needs to review the financing section for (1) lease liabilities and (2) interest paid on perpetual securities. This is in addition to the "interest received" I mentioned earlier.

[snowballwisdom]

Hi Wei Jian,

thanks for your advise. 

Actually this one is Genting SP's cashflow I used as example.


Noted.

BTW, interest charges as mentioned by you not in operating segment, I believe it is there, classify under finance charges?


Your mention on lease liabilities. 
Is it because lease liabilities to you is consider rental, as such it should be classify under operating activities? 
When company sign a rental contract, they actually put into balance sheet as an asset instead of expensing it monthly basis?

[snowballwisdom]

BTW, also to add.

When earlier I was wondering A,B,C

some of the consideration

1) If company have a lot of cash, the interest income alone can skew the cashflow from operating activities
2) the promptness of payment from creditors or to suppliers can alter the cashflow from operating activities.


Can pick your mind. The considerations is it people think that it will smoothen over a period of time, example 5 or 10 years as such not a big consideration.

Thanks.

[CY09]

I will use (A).

I always omit WC changes because of its lumpiness

[weijian]

Hi Wei Jian,

thanks for your advise. 

Actually this one is Genting SP's cashflow I used as example.


Noted.

BTW, interest charges as mentioned by you not in operating segment, I believe it is there, classify under finance charges?


Your mention on lease liabilities. 
Is it because lease liabilities to you is consider rental, as such it should be classify under operating activities? 
When company sign a rental contract, they actually put into balance sheet as an asset instead of expensing it monthly basis?

Actually, what really matters is Free Cash Flow (FCF). This is what is available to share holders after accounting for all the movement in the cash and after business reinvestment. 

- © is the nearest metric to derive FCF. So it is in this context that I answer your question. I do not really focus much on operating cash flow (OCF) whether before/after WC changes. In other words, based on my method of review, if the changes are huge, I will filter away such businesses (with big WC changes) automatically (ie. I will not be interested to invest in it anymore). Such businesses include (1) those whose capital are trapped by receivables (meaning they fund their customers' growth), inventories (risk of write-downs) and project based (costs overrun, customers defaults). But do note these are all my personal style/quirk in investing. There is no right or wrong here.

- It is also valid/prudent to look at OCF/FCF over a period of years (maybe 5 to 10 years) to capture a good picture of how Mgt thinks. I am not a businessman and so I would want to learn by looking at it in this way.

- I took a look at Genting Spore 1H22. And it seems "financing charges" and "lease payments" are under "Financing activities".

- Due to the way certain charges are defined, one needs to review through "financing activities" to add/subtract to ©. List of examples are like "interest paid to perpetuals holders" and "lease liabilities" as I mentioned. And yes, lease liabilities are like rental paid. I think a few years back, companies started to adopt a new accounting standard and will have a lease asset and corresponding lease liability on the balance sheet (I can see its "usefulness" since it helps to understand future liabilities per say). That said, I am not an accountant and so I might not be giving the best answer here.

[CY09]

Adding my opinion on why I used (A).

As mentioned by Weijian, each line items in working capital changes has many flaws. Hence I am cognizant of their mechanisms and how companies use it to "fool" investors. Therefore instead of analyzing line item by line item, I just rely on (A) as it determines the true cash flow ability of the business.

Sea Group is a good example of how (A) and © can differ greatly. Sea has been constantly using accrued expenses and deferred revenue in the form of free fire credits from Gamers (deferred revenue mainly came from this segment). While (A) was consistently negative, © was consistently cashflow positive due to the deferred revenue being positive.

With the decline in popularity of Free Fire, this deferred revenue mechanism showed its ugly head as the line item will be negative henceforth, for this year, (A) will remain negative but © will no longer be positive. © requires very good knowledge of the company for investor to be confident to utilize, (A) requires less knowledge as it shows the cashflow generation ability before the company uses its array of accounting magic tricks to do a magic show.

< Just my opinions>

[¯|_(ツ)_/¯]

<Just what I'm doing>

In short: C+B+A

I seldom look at cashflow because most of the financial reports that I read would be into the recycle-bin before I go into it's cashflow statement.

When I need to study the cashflow, it would means that this is a company that worth a deeper look.  There are various reasons why is it so and one of the common reason for my case is (sustainable/continuous) dividend paying theme.

For a quick glance, I use C.

However, in most case, C is not enough to provide me a good picture of what had happened.  Only by looking into C+B+A in details, then I could satisfied myself of how C is derived and whether the result of C could be repeated in the next year.

Reading (and imagining how) cashflow is rather tedious and I'm lucky that I don't have to do this often as most of the financial reports could be chucked asides quickly without the need to study the cashflow (for me). 

Gratitude!



https://mrtfi2024.wordpress.com/2020/10/...anics-agm/

[snowballwisdom]

Thanks Weijian, CP and others for your thoughts.

Initially came to conclusion to use C, but seeing SEA's cashflow gives a good example. Seeing a few times and reading a few times still don't understand how SEA does their accounting. Anyway not looking into SEA actually, seems complicated.
So likely will look at A and C side by side.

Thanks for confirming on interest payment. The finance charge I mention, likely those bank charges. You are right interest payment and lease liabilities should be adjusted. Thanks

[BlueKelah]

Hi all, may I know usually when we looking at cash flow of a company,

usually people look at A, B or C?

A -> Operating CF before movements in working capital
B -> Cash generated from operating activities
C -> Net cash generated from operating activities

I look at the whole thing as cash flows is to show you where all the money flows around, IN and OUT of the company, of course the more postive the cash flow the better!!== CASH COW company. It will correspond somewhat to the other two parts which is income statement and balance sheet. 

usually if the net profit from years of operation is enough to fund the dividend payouts(sustainable divs) then I wouldnt be to stressed about analysing cash flow in details. 

However some folks like to invest like buffett and use the FCF valuation model to calculate the intrinsic value, so if you intend to value companies that way then you will use the cash flow statements more.