Cash flow statement

Cash is king !
Cash flow statement
= the table to explain the variation of the cash asset, ie. the cash at
disposal of the company, during a period.

Cash flow statement

Cash-Out (CO) Cash-In (CI)
= cash that exits out of the company = cash that enters in the company

Eg: paid taxes, paid salaries, interests, Eg: collected sales, interest paid to the
services bought and paid company

Variation of cash asset = CI - CO

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The importance of cash
BALANCE SHEET
ASSETS LIABILITIES
… Result: 400
… …
… …
… …
… …
… …
Cash assets: 90 …

Questions:
- Point out where the cash is.
- With what can I buy a fixed asset at 75?
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- With what can I reimburse a debt of 40?
What is a bankruptcy ?

A company in bankruptcy is a company that is in the process of

collective proceedings, resulting in a judicial reorganization or a
judicial liquidation.

It is the cessation of payments that marks the entry into the

reorganization or liquidation procedure, ie. the fact that the
company cannot immediately cope with its liabilities due with its
available assets (not enough cash to honor its commitments).

During the declaration of the company's cessation of payments to

the commercial court, the company mentions at the moment t
the list of its assets and its liabilities, so its balance sheet, that
is why in French this event is called “dépôt de bilan”.
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The importance of cash

"The result is partly virtual." Examples:

 Incomes contain sales invoiced but not yet paid
 Expenses include calculated expenses (depreciation
expenses, without cash-out and depending on
accounting choice)

"The cash is real, it is an asset.

It's the ability of a company to make new investments. "

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The importance of cash

"The result: Positive, the patrimony gains weight.

Negative, the patrimony is losing weight.

Cash: if it runs out, it's death.”

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 Income statement for the year Y :
Explain how the result was formed from 01/01/Y-1 to 31/12/Y

BALANCE SHEET AT 31/12/Y-1 BALANCE SHEET AT 31/12/Y

ASSET LIABILITIES ASSET LIABILITIES

FIXED ASSETS EQUITY: FIXED ASSETS EQUITY:

- Tangible assets - Share capital - Tangible assets - Share capital
- Intangible assets - Reserves - Intangible assets - Reserves
- Financial assets - Result - Financial assets - Result

OPERATING CURRENT ASSETS DEBTS: OPERATING CURRENT ASSETS DEBTS:

- Inventories - Long term debts - Inventories - Long term debts
- Trade receivables - Medium term debts - Trade receivables - Medium term debts
- Other receivables - Short term-debts - Other receivables - Short term-debts
- Trade payable - Trade payable
CASH ASSETS CASH ASSETS
- Cash and cash equivalent - Cash and cash equivalent

Cash flow statement for the year Y

Explain the variation of the cash assets between 31/12/Y-1 and 31/12/Y
Cash Flow Statement

We want to explain:

𝑉𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑎𝑠𝑠𝑒𝑡𝑠 𝑜𝑛 𝑎 𝑝𝑒𝑟𝑖𝑜𝑑

= 𝐶𝑎𝑠ℎ 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 – 𝐶𝑎𝑠ℎ 𝑎𝑠𝑠𝑒𝑡𝑠 𝑎𝑡 𝑜𝑝𝑒𝑛𝑖𝑛𝑔

The variation of cash assets on a period can be fully explained by 3

types of cash flows
- Cash flows from Operations (CFO)
- Cash flows from Investments (CFI)
- Cash Flow from Financing (CFF)

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Variation of cash assets

Cash flow statement

(A): Cash flows from operating activities (aka CFO, operating flows)
(B): Cash flow from investment activities (aka CFI, investment flows)
(C): Cash flow from financing activities (aka CFF, financing flows, funding flows)
Variation of cash assets = (A) + (B) + (C) = (1) – (2)
(1) Cash assets at the closing
(2) Cash assets at the opening

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Operating flows (CFO)

Operating flows
Operating cash-in (payments from clients)
- Operating cash-out (payment to suppliers, payments of salaries, etc.)
= Cash Flows from Operations (CFO)

Direct method.

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Operating flows (CFO)

Operating flows
+ EBITDA
- Corporate tax
- WCR increase
= Cash Flows from Operations (CFO)

Indirect method.

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Operating flows
1) The operating flows correspond to the difference between the
cash-in from operation (income transformed into cash-in) and the
cash-out from operation (expenses transformed into cash-out).

2) EBITDA (net of corporate tax) measures the difference between

cashable income and cashable expenses.

The difference between (2) and (1) is explained by :

- An increase in operating receivables
- An increase in inventories
- A decrease in operating payables
 That is to say, an increase of Working Capital Requirement on 13
the period.
Investment flows (CFI)

Investment flows
- Acquisitions of fixed assets
+ Disposals of fixed assets
= Cash Flows from Investments (CFI)

Cash Flows from Investments correspond to investments in new fixed assets,

minus the disposals of fixed assets (sale of fixed assets) made during the period.

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Free Cash Flow
Free Cash Flow to the Firm (FCFF) is the sum of cash flows from
operations (CFO) and cash flows from investments (CFI).

𝐹𝐶𝐹𝐹 = 𝐶𝐹𝑂 + 𝐶𝐹𝐼

It is therefore the cash flows that the company has at its disposal once
the necessary investments have been paid. The company can do what it
wants: repay debts, pay a dividend, increase its cash assets for
investment in a future year ...

The free cash flow are useful for two things: measure the financial
capacity of a company (to repay its debt for instance), and calculate its
value from the discounting of free cash flow flows (attention, take the
FCFF before financial interests in this case).
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Financing flows (CFF)
Funding flows
+ New loan emission
- Loan capital reimbursement
- Interest payment
+ Social capital increase
- Social capital decrease
- Dividends
= Cash flows from financing (CFF)
Cash flows from financing are flows from or to capital providers: lenders
(new loans, repayment of loans) and shareholders (increase or decrease of
capital, dividend).

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 Cash flow statement
+ Operating cash-in (payments from clients)
- Operating cash-out (payment to suppliers, payments of salaries, etc.)
= Cash Flows from Operations (A)
- Acquisitions of fixed assets
+ Disposals of fixed assets
= Cash Flows from Investment (B)
(A) + (B) = Free Cash Flows
+ New loan emission
- Loan capital reimbursement
- Interest payment
+ Social capital increase
- Social capital decrease
- Dividends
= Cash Flows from Financing (C)
Variation of cash assets = (A) + (B) + (C) = (1) – (2)
(1) Cash assets at the closing
(2) Cash assets at the opening
 Cash flow statement
+ Net profit
+ Depreciation and provision allowances
- WCR increase
= Cash Flows from Operations after interest paid (A)
- Acquisitions of fixed assets
+ Disposals of fixed assets
= Cash Flows from Investment (B)
(A) + (B) = Free Cash Flows after interest paid
+ New loan emission
- Loan capital reimbursement
+ Social capital increase
- Social capital decrease
- Dividends
= Cash Flows from Financing (C)
Variation of cash assets = (A) + (B) + (C) = (1) – (2)
(1) Cash assets at the closing
(2) Cash assets at the opening
Example: Arcelor Mittal
en M$ 2016
Net profit 1734
+ Provision and depreciation allowances 2771
- WCR Increase 1000
Cash flows from Operations (A) 3505
-Investment in tangible and intangible assets 2444
+Disposal of tangible and intangible assets 119
-Investment in financial assets 0
+Disposal of financial assets 1182
Cash flows from Investment (B) -1143
Free Cash Flow after financial expenses (A)+(B) 2362
+Capital increase 3115
-Dividends paid 61
-Capital repayment of financial debt 8429
+Issuance of new debts 1526
Cash Flows from Financing (C) -3849
Variation of Cash assets: (A)+(B)+(C) = (2) - (1) -1487
Cash assets at the opening (1) 4102
Cash assets at the closing (2) 2615
Example: Arcelor Mittal
en M$ 2016
Net profit 1734
+ Provision and depreciation allowances 2771 We have to deal with a
- WCR Increase 1000 company that, while
Cash flows from Operations (A) 3505 investing in tangible and
-Investment in tangible and intangible assets 2444 intangible fixed assets,
+Disposal of tangible and intangible assets 119 made the choice of
-Investment in financial assets 0 deleveraging (reducing its
+Disposal of financial assets 1182 debts) in 2016:
Cash flows from Investment (B) -1143 - Using some of the
Free Cash Flow after financial expenses (A)+(B) 2362 flows generated by his
activity
+Capital increase 3115
- By generating cash
-Dividends paid 61
through the sale of
-Capital repayment of financial debt 8429
financial fixed assets
+Issuance of new debts 1526 - By increasing its
Cash Flows from Financing (C) -3849 capital
Variation of Cash assets: (A)+(B)+(C) = (2) - (1) -1487
Cash assets at the opening (1) 4102
Cash assets at the closing (2) 2615
 Cash flow statement
+ Net profit
+ Depreciation and provision allowances
- WCR increase
= Net operating flows after interest paid (A)
- Acquisitions of fixed assets
+ Disposals of fixed assets
= Net investment flows (B)
(A) + (B) = Free Cash Flows after interest paid
+ New loan emission
- Loan capital reimbursement
+ Social capital increase
- Social capital decrease
- Dividends
= Net financing flows (C)
Variation of cash assets = (A) + (B) + (C) = (1) – (2)
(1) Cash assets at the closing
(2) Cash assets at the opening
Possible presentations
The cash flow statement presented in the previous
slide is a commonly used form and it is easy to start
from the net result for arrival to the operating flows
generated by the activity.

The problem is that this presentation includes the

financial expenses (interest) in the net result whereas
the purists would prefer that they be attached in the
funding flows (which makes the most sense).

So we also find the presentation of the type of the next

slide, less common, but all the more logical.
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 Cash flow statement
+ EBITDA
- Corporate tax (with calculation based on EBIT)
- WCR increase
= Operating flows(A) [without financial interest polluting the analysis]
- Acquisitions of fixed assets
+ Disposals of fixed assets
= Net investment flows (B)
(A) + (B) = FCFF = Free cash flows to Firm [without financial interest polluting the analysis]
+ New loan emission
- Loan capital reimbursement
- Financial interest cost (integrating tax effect)
+ Social capital increase
- Social capital decrease
- Dividends
= Net financing flows (C) [logically integrating the real financial interest cost]
Variation of cash assets = (A) + (B) + (C) = (1) – (2)
(1) Cash assets at the closing
(2) Cash assets at the opening
 Cash flow statement
+ EBITDA
- Corporate tax (with calculation based on EBIT)
- WCR increase
= Operating flows(A)
- Acquisitions of fixed assets
+ Disposals of fixed assets
= Net investment flows (B)
(A) + (B) = FCFF = Free cash flows to Firm
+ New loan emission
- Loan capital reimbursement
- Financial interest cost (integrating tax effect)
+ Social capital increase
- Social capital decrease
- Dividends
= Net financing flows (C)
Variation of cash assets = (A) + (B) + (C) = (1) – (2)
(1) Cash assets at the closing
(2) Cash assets at the opening
Exercise - ENGIE

You will find on the following slide the cash flow statement of ENGIE for
the year 2015.

Question 1: How to explain that despite a negative net result, ENGIE

generates more than 10 billion cash from its activity?

Question 2: What are the main uses of the cash flows generated by the
operations?

Question 3: How much are the Engie FCFFs in 2015?

Question 4: How are FCFFs distributed among the capital providers?

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 ENGIE Group - in M€ 2015
EBIT -2 948
D&A 13 890
Corporate tax paid -1 722
Decrease of WCR 1 163
Operating cash flows (A) 10 383
Tangible and intangible investments -6 459
Financial investments -500
Disposal of fixed assets 507
Other investment flows 223
Investment flows (B) -6 229
Capital increase 21
Dividends paid -3 107
Repayment of financial debts -4 846
Cash-in due to new loans 5 834
Financial interest paid -1 545
Financial interest received from cash asset 126
Financing flows (C) -3 517
Variation of cash asset : (A)+(B)+(C) = (2) - (1) 637
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Cash assets at the beginning of the period (1) 8 546
Cash Assets at the end of the period (2) 9 183
Exercise – ENGIE -Correction

Question 1: How to explain that despite a negative net result, ENGIE

generates more than 10 billion cash from its activity?

Mostly (13.9 B€) because depreciation and amortizations have reduced

operating income but did not have any impact on cash flow (ie.
calculated expenses without cash going out).
To a lesser extent (1.2 B€) as Engie managed to reduce its WCR, thus
having a positive impact on the cash generated by the activity

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Exercise – ENGIE -Correction

Question 2: What are the main uses of the cash flows generated by the
activity?
They are 3 types:
- Finance investment (60%)
- Repay and remunerate the capital providers (34%)
- Increase cash assets (6%)

M€ Percentage
Operating cash flows 10 383 100%
 Finance new investment 6 229 60%
 Repay and remunerate the capital providers 3 517 34% 28

 Increase cash assets 637 6%

Exercise – ENGIE -Correction

Question 3: How much are the Engie FCFFs in 2015?

FCFF= operating cash flows + investment cash flows
FCFF= 4 154 M€

Question 4: How are FCFFs distributed among the capital providers?

74% flow to shareholders and 10% flow to lenders (the remaining ~ 15%
increase cash flow)

M€ Percentage

FCCF 4 154 100%

Flows to shareholders 3 086 74%
Flows to debt holders 431 10% 29

Increase cash flows 637 15%