Significance of operating cash Flow

1Niteen S Dharmawat - http://dharmawat.blogspot.com/

Decoding Investment in Equity Market

Significance of Operating Cash Flow (CFO/OCF)

Niteen S Dharmawat

Blog: http://dharmawat.blogspot.com/

Twitter: @niteen_india

Slideshare: www.slideshare.net/ndharmawat/

http://dharmawat.blogspot.com/


Cash flow concept



Cash From Operations (CFO/OCF)



A Scooter Manufacturer… A quick example

Cash

Credit

Cash recorded in OCF

P&LSales, Profits recognized

Cash Received

Yes Bad debts

No

Warning sign: Check Receivables…



- Money a company brings in from regular business

activities

- It is a part of cash flow statements

- It is more important than Net Income because Cash

flow is harder to manipulate and Cash is the King

- If company is selling at credit then can still show

net income but can’t show positive Operating Cash

Flow as the Cash is yet to be received.

- Ideal “CFO:Net Income” ratio -> Close to 1

Importance of CFO



How to get CFO from Net Income

No calculation. Directly available…



Case 1: A vertically integrated multinational medical

technology Group

Analyzed in Aug’12 at ~140

and concluded a possible burst.

CMP: ~25



Case 2: Education and training company based in Chennai

Analyzed in Sep’11 at ~350 and concluded a possible

burst. CMP: ~35 ‘Darling’ of punters Several stories around the business model FII holding close to 28% (now less than 1.4%) Some prominent names on the board could also

not save it CBI caught one of the directors of the company

in a bribery case

Parameter Mar-11 Mar-10 Mar-09 Mar-08

Net Profit 67.64 45.45 22.08 13.8

CFO 16.01 25.13 -8.98 13.31

Signal

In INR Crs

‘Supported’ by poor shareholding pattern.



Case 3: A ‘fast growing’ Indian Pharmaceutical company


burst. CMP: ~38

A recent casualty Analysts/research house giving aggressive

targets Several stories around the company Promoters pledged the shares

In INR Crs

Parameter Jun-13 Jun-12 Jun-11 Jun-10 Jun-09 Jun-08

Net profit 53.71 42.77 33.18 22.33 18.63 27.19

CFO -70.44 -53.43 -35.84 -28.11 -50.78 -40.46

Signal



Case 4: Unified Supply Chain & Infrastructure Group


burst. CMP: ~18



Quiz…

Questions

1. Name all the four companies which were discussed in this presentation?

2. Name 3 companies (different from 4 discussed here) where you find significant mismatch between CFO and NI?

Mail your answers to me:

[email protected]


mailto:[email protected]

Thank you

Email: [email protected]

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mailto:[email protected]


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IMPORTANT DISCLAIMER: Investment in equity shares has its own risks. Sincere efforts have been made to present the right perspective. This presentation/material/email/blog write-up does not give any buy/sell/hold recommendation directly or indirectly. The details should not be concluded as a recommendation for buy/sell/hold. It does not give any price targets. This is with the sole objective of taking feedback from the readers/viewers. The information contained herein is based on my study and upon sources that I consider reliable. I, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and not intended for any investment decisions. I am not responsible for any profit or loss incurred based upon it & take no responsibility whatsoever for any financial profits or loss which may arise from the discussion thread above/anywhere in communication. It is safe to assume that I, my family, friends have vested interest in any of the stock ideas discussed here and we reserve the right to take an opposite position to what we have today. Please do your due diligence and take the help of a qualified investment adviser and a registered equity analyst before you make any investment decisions. I am neither of these.

14Blog: http://dharmawat.blogspot.com/

About the presenter:

Niteen is an MBA and cleared CFA Level 2, CFA Institute USA. A firm believer in long-term financial planning, and a 20 years veteran of the stock market. He also conducts free investor awareness sessions.

He likes reading books/magazines/news papers on the topics as diverse as general management, technology, investment, fiction, marketing and the Gita.

He is a person who believes in "Everything else can stop but learning".


Significance of operating cash Flow

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