Okomu Oil

[stance]

[quote=dr.abrahamb;122510]

Originally Posted by stance

The negative signs are not a function of the 'mathematical' expressions above, but of the movement of cash i.e. ascribe a negative value to the difference when cash is tied down or is paid out, and a positive value when cash is paid in. E be like say you know plenty book; the thing na arithmetic O, no be maths or add-maths.

I no know book oo, maybe na why I no dey understand.

So from the explanation, is payables positive? What I understand is that we add up the differences in stocks, receivables and payables (ignoring the positive or negative values) so how do we know/decide that cash is paid in or out as to add or subtract WCC from PAT.

Oga hope am not asking too much question.

[dr.abrahamb]

[quote=stance;122512]

Originally Posted by dr.abrahamb

I no know book oo, maybe na why I no dey understand.

So from the explanation, is payables positive? What I understand is that we add up the differences in stocks, receivables and payables (ignoring the positive or negative values) so how do we know/decide that cash is paid in or out as to add or subtract WCC from PAT.

Oga hope am not asking too much question.

No sir. I will not be fair to you, if I do not allow you to read these things up for yourself. You have to see it like you own a company in which you are the Working Capital Manager; checking which supplier(payables/trade creditor) gets paid, which distributor(receivables/trade debtors) comes to pay and what commodities(stocks/inventory) are left in the ware house. Its better seeing the picture than just trying to crunch the numbers. That way you will know why and what about cashflow analysis. Why not read-up WORKING CAPITAL, and get a good grasp of it my brother?

[duduspace]

Doki, I just wanted to say I too have gained a bit from this Cash Flow thingie and looking for practical applications of it in my stock choices in the real sector of the NSE.
Please help with some of these acronyms though.

I know this two and what they mean:

Cash flow from Operations CFO
Working capital changes WCC

But na wetin be FCFE and is it just an indication of either a positive or negative balance of monetary inflow into the company?

And I don't really understand why Depreciation should be involved when it doesn't impact cash directly except if you have an eye future expenditure on renewing assets.
Lest I forget too even though this might sound a bit naive, doesnt the cash balance of the company itself at the end of the day also have a part to play in all these?


Update: I just found out FCFE is Free Cash Flow to Equity and I 'think' I understand what it means.

Just one more question having to do with this:

Payables N0.079417 (N0.214903b - N0.135486b){reduction in trade creditors i.e. cash paid-out}

Will an increase in Trade creditors be counted as positive towards cashflow rather than negative in terms of cash being paid out to reduce amount owed to Trade Creditors? I ask this cos I've always looked at increase in Trade creditors as a kind of evil.

[dr.abrahamb]

Originally Posted by duduspace

Doki, I just wanted to say I too have gained a bit from this Cash Flow thingie and looking for practical applications of it in my stock choices in the real sector of the NSE.
Please help with some of these acronyms though.

I know this two and what they mean:

Cash flow from Operations CFO
Working capital changes WCC

But na wetin be FCFE and is it just an indication of either a positive or negative balance of monetary inflow into the company?

And I don't really understand why Depreciation should be involved when it doesn't impact cash directly except if you have an eye future expenditure on renewing assets.
Lest I forget too even though this might sound a bit naive, doesnt the cash balance of the company itself at the end of the day also have a part to play in all these?


Update: I just found out FCFE is Free Cash Flow to Equity and I 'think' I understand what it means.

Just one more question having to do with this:


Will an increase in Trade creditors be counted as positive towards cashflow rather than negative in terms of cash being paid out to reduce amount owed to Trade Creditors? I ask this cos I've always looked at increase in Trade creditors as a kind of evil.

Oga Duduspace, you have asked from a knowledgeable position. I dey come make I finish wetin I dey do.

[horlads]

Originally Posted by duduspace

Will an increase in Trade creditors be counted as positive towards cashflow rather than negative in terms of cash being paid out to reduce amount owed to Trade Creditors? I ask this cos I've always looked at increase in Trade creditors as a kind of evil.

I relaise that you have been editing this your post for the past 30 mins...make I try help you small...

A decrease in Trade creditors means you used cash to settle them...a reduction in cash
An increase in Trade creditors means that you conserved cash you could have used to pay....regarded as an increase in cash.

Depending on the credit terms you agree with your creditors, an increase in trade creditors might help you expand your business without hurting your cash flow....

The key thing is that you should be able to pay your bills as at when due to avid extra charges....

and the ratios you will use are them acid test and quick ratio....

that's all I can say except I consult my upper upper faculty

[dr.abrahamb]

Originally Posted by duduspace

Doki, I just wanted to say I too have gained a bit from this Cash Flow thingie and looking for practical applications of it in my stock choices in the real sector of the NSE.
Please help with some of these acronyms though.

I know this two and what they mean:

Cash flow from Operations CFO
Working capital changes WCC

But na wetin be FCFE and is it just an indication of either a positive or negative balance of monetary inflow into the company?

And I don't really understand why Depreciation should be involved when it doesn't impact cash directly except if you have an eye future expenditure on renewing assets.
Lest I forget too even though this might sound a bit naive, doesnt the cash balance of the company itself at the end of the day also have a part to play in all these?


Update: I just found out FCFE is Free Cash Flow to Equity and I 'think' I understand what it means.

Just one more question having to do with this:


Will an increase in Trade creditors be counted as positive towards cashflow rather than negative in terms of cash being paid out to reduce amount owed to Trade Creditors? I ask this cos I've always looked at increase in Trade creditors as a kind of evil.

Depreciation, is payment in installments, for fixed assets(classified as capital expenditure) that just cannot be 'expensed' at once, as a cost; from the income statement. It is usually far bigger than other costs/expenses like interest on debt, taxes, cost of sales etc. If it could be 'expensed' at once as a cost(and not a capital expenditure), it would have been factored into your income statement as part of operational costs. Hence it would have consumed cash directly.

But alas, the company decided it wants to 'expense' it over time. In this way, only a fraction of the amount is deducted from the income statement each year. This fraction deducted from the income statement each year is NOT paid for in 'cash' generated from operations. This is why depreciation is called a NON-CASH EXPENSE; it is expensed in the income statement but is not paid for(does not consume cash) generated from operations. This is why it is added back to net-income when computing 'cashflow'.

The 'cash balance balance of the company' does not affect your computation of cashflow. This 'cash balance of the company' is usually the Net CashFlow(of all 3 cashflow segments; NCF = CFO + CFI + CFF) or 'cash and bank balances' that is arrived at after Net Cashflow of last year is factored into it. {CFI is cashflow from investment, CFF is cashflow from finance; explaining these have to be elsewhere}

The last question deals with WCC. But let me first differentiate working capital from working capital changes for you. Working capital is simply Current Assets minus Current liabilities(abeg make you 'jack' this one). If a company does not have current assets that can easily be converted to cash, when debtors come knocking, it can easily go bankrupt(no matter how much longterm assets it has) or must go a-borrowing. This is why ratios like Cash Ratio, Quick Ratio, Current Ratio are used. The best users of these ratios are lenders/suppliers who want to know whether the company has what it takes to meet debt-payments at short notice.

Working capital changes on the other hand refers to operational changes that affects cash availability(key words here are 'cash availability'). Operations need cash to go on. The trio involved in operational changes that affect availability of cash are RECEIVABLES, INVENTORIES and PAYABLES.

Receivables - monies of goods sold and already expensed in the income statement, but yet to be collected from the trade debtors

Inventories - manufactured goods produced or raw materials bought with cash generated from operations

Payables - monies owed to suppliers of raw materials

See this example, and I hope it helps:
WCC factors 2012 2011 Apparent Change Value ascribed
Receivables N2bn N4bn DECREASE +N2bn
Inventories N5bn N3bn INCREASE -N2bn
Payables N2.5bn N1.5bn INCREASE +N1bn
Working capital change is therefore (+2)+(-2)+(+1) = +N1bn

In summary,
Increase in Receivables means decrease in cash{more goods in the hands of distributors, but not paid for as yet; cash not collected that is}
Decrease in Receivables means increase in cash{more debtors pay up what they owe the company}
Increase in Inventories means decrease in cash{more finished products in the warehouse unsold}
Decrease in Inventories means increase in cash{more finished products sold out}
Increase in payables means increase in cash{suppliers not paid and the cash that is supposed to be paid to them is being re-used in operations like a non-interest loan}
Decrease in payables means decrease in cash{suppliers paid}

I have tried breaking it down to the barest facts. Hope say I try?

[duduspace]

Oga Doki you do well, CFI 101 (Introduction to Cashflow Investing) highly summarised and calls for much revision but gratefully received and filed away for recurrent referencing.

[Dicobody]

FORECAST PROFIT & LOSS INFORMATION 2012 (in 000 ngn)
2nd Quarter 2012
in (000) ngn
Turnover 2,667,145
Cost of Sales 1,536,822
Profit Before Taxation 1,130,323
Proposed Adjustment for Exceptional / Extra OrdinaryItems -
Profit Before Taxation and Exceptional / Extra Ordinaryitems 1,130,323
Forecast Taxation 85,768
Profit After Taxation 1,044,555
Cash Flow information 2011
Net Result 1,044,555
Cash Flow from Operating Activities 256,350
Operating Cash flow from Working Capital Changes -3,411
Net Cash Flow from OperatingActivities 252,939
Cash Flow from Financing Activities -480
Cash Flow from Investing Activities -718,640
Net Decrease in Net Cash and Cash Equivalents 578,374
Cash / Bank Balance at the Beginning of the Period 4,081,477
Cash / Bank Balance at the End of the Period 4,659,851

[cashrules]

Originally Posted by Dicobody

FORECAST PROFIT & LOSS INFORMATION 2012 (in 000 ngn)
2nd Quarter 2012
in (000) ngn
Turnover 2,667,145
Cost of Sales 1,536,822
Profit Before Taxation 1,130,323
Proposed Adjustment for Exceptional / Extra OrdinaryItems -
Profit Before Taxation and Exceptional / Extra Ordinaryitems 1,130,323
Forecast Taxation 85,768
Profit After Taxation 1,044,555
Cash Flow information 2011
Net Result 1,044,555
Cash Flow from Operating Activities 256,350
Operating Cash flow from Working Capital Changes -3,411
Net Cash Flow from OperatingActivities 252,939
Cash Flow from Financing Activities -480
Cash Flow from Investing Activities -718,640
Net Decrease in Net Cash and Cash Equivalents 578,374
Cash / Bank Balance at the Beginning of the Period 4,081,477
Cash / Bank Balance at the End of the Period 4,659,851

For those of us who are gurus in cashflow analysis....does this projected cashflow look good and why?

[nosa2]

Dividend yield is above 10% and yet the stock fell two days straight. Could it be signs of Q1 results

[goldsun]

Originally Posted by dr.abrahamb

Q3...

...as explained earlier, CFO using the indirect method is calculated:

CFO = PAT Depreciation /- Working Capital Changes
PAT = N3.789b (culled from income statement above)
Dep = Not supplied...
Stocks N0.377877b (N0.998123b - N1.376b){increase in stocks i.e. more cash tied down as work-in-progress or finished products}
Receivables N0.133172b (N0.195186b - N0.328358b){increase in trade debtors i.e. more cash awaiting collection}
Payables N0.079417 (N0.214903b - N0.135486b){reduction in trade creditors i.e. cash paid-out}
(in all parameters of WCC, when cash is 'tied-down or goes-out', you ascribe a negative figure to the value you get)
WCC = N0.590466b{negative}
(Always subtract the current value from the last audited, and note that while stocks and receivables tie down cash, payables make cash available. It therefore follows that an increase in stocks or receivables from one audited result to a new result(whether Q1,2 or 3) means reduction{neg} in cash and vice versa, the reverse is the case with payables)
Therefore CFO = N3.789b Dep - N0.590466b
If Dep was supplied, we would have obtained the exact value of CFO this way. Since Dep is not supplied, I (my conservative approach) do make an assumption that this figure is at least equal to capital expenditure, producing a net capital expenditure of zero. With this assumption, CFO becomes equal to FCFE:
So therefore FCFE = N3.789b - N0.590466b = N3.198534b
If fixed assets had not been supplied on the balance sheet, I could have taken my FCFE from this conservative approach and lived with it. But where fixed assets have been supplied as can be culled from the balance sheet above, why not get the actual value for the true FCFE available to shareholders? To wit:
FCFE = PAT Dep - Capital Expenditure - WCC, where capital expenditure is difference in fixed assets
(we would have factored-in the difference in long-term investments were they not nil above)
= N3.789b - N0.269b - N0.590466 = N2.929534b FREECASH!!! as at Q3
nb: Working Capital is computed differently from WCC



I know we can do same with the above...and am happy to be of help anyday, anytime...

i didn't have time to study this untill few days ago. The part in bold is confusing, since the wcc has being subtracted from PAT what then are we subtracting from the last audited CFO

[dr.abrahamb]

Originally Posted by goldsun

i didn't have time to study this untill few days ago. The part in bold is confusing, since the wcc has being subtracted from PAT what then are we subtracting from the last audited CFO

Kindly be more specific. Which part in 'bold' and which 'audited CFO'?

[goldsun]

Originally Posted by dr.abrahamb

Kindly be more specific. Which part in 'bold' and which 'audited CFO'?

you created the impression that wcc is to be subtracted from last audited report. But in your calculation you subtracted it from the PAT

[dr.abrahamb]

Originally Posted by goldsun

you created the impression that wcc is to be subtracted from last audited report. But in your calculation you subtracted it from the PAT

Okaaaaay, am sorry you got it otherwise. When I wrote in bold; ''always subtract...from the last audited'', I meant the net of each variable(receivables, inventory, payables) in the WCC and not the WCC itself.

To re-cap:
CFO = PAT + Depreciation - WCC

FCFE = PAT - NCE - WCC (where NCE; net capital expenditure, is equal to Depreciation minus Capital expenditure)

Modest CFO = PAT - WCC (where modest CFO implies an assumption that depreciation and capital expenditure are equal; giving an NCE of zero).

[goldsun]

Originally Posted by dr.abrahamb

Okaaaaay, am sorry you got it otherwise. When I wrote in bold; ''always subtract...from the last audited'', I meant the net of each variable(receivables, inventory, payables) in the WCC and not the WCC itself.

To re-cap:
CFO = PAT Depreciation - WCC

FCFE = PAT - NCE - WCC (where NCE; net capital expenditure, is equal to Depreciation minus Capital expenditure)

Modest CFO = PAT - WCC (where modest CFO implies an assumption that depreciation and capital expenditure are equal; giving an NCE of zero).

but you didn't subtract from the last audited in your calculation, you subtracted from corresponding quarter. Another issue i have is how can one apply this to financial institutions expecially banks

[dr.abrahamb]

Originally Posted by goldsun

but you didn't subtract from the last audited in your calculation, you subtracted from corresponding quarter. Another issue i have is how can one apply this to financial institutions expecially banks

Every figure arrived at was gotten the same way I explained. You know what Oga goldsun, why not put up your figures from the same balance sheet here, so that we can see where our differences lie?

[123.rado]

Okomuoil marked down today by N4.00 dividend. This has been an enjoyable and unbelievable ride.

[Dicobody]

Originally Posted by 123.rado

Okomuoil marked down today by N4.00 dividend. This has been an enjoyable and unbelievable ride.

My oga d ride too
sweet