Cash Flow Analysis
Part 1:
Theoretical Analysis
1. What is Cash Flow Analysis?
Cash flow analysis is the process of examining the inflow and
outflow of cash in a business over a specific period. It helps in
understanding how well a company manages its cash to fund
operations, pay debts, and invest in growth opportunities. The
cash flow statement is divided into three main sections:
Operating Activities, Investing Activities and Financing
Activities.
2. Significance from a Company's Perspective:
Liquidity Assessment- Ensures the company can meet its
short-term obligations.
Operational Efficiency: Identifies how efficiently a company
generates cash from core operations.
Investment Planning- Provides insights into cash spent on or
generated from investments.
Debt Management- Evaluates the company's ability to raise or
repay debt.
Profitability vs. Cash Flow: Highlights discrepancies between net
income and cash flow.
3. Definitions:
Cash Flow from Operations- Cash generated or used in day-to-
day business activities. It includes net income adjusted for
changes in working capital and non-cash expenses (e.g.,
depreciation).
Cash Flow from Investing- Cash spent on or received from
investment activities, such as purchasing or selling assets,
equipment, or securities.
Cash Flow from Financing- Cash inflow or outflow from funding
activities, such as issuing shares, repurchasing equity, or
borrowing/repaying debt.
4. What is Free Cash Flow?
Free cash flow (FCF) is the cash available after deducting capital
expenditures (CAPEX) from operating cash flow. It represents the
funds a company can use for expansion, paying dividends, or
reducing debt.
5. Positive and Negative Cash Flow:
Positive Cash Flow- Indicates that the company has more
inflows than outflows, signaling good financial health.
Negative Cash Flow- Indicates that outflows exceed inflows.
While concerning, it may also mean the company is investing
heavily for future growth.
PART-2
Financial Analysis of Outlook Publications
Liquidity Analysis:
1-Current Assets vs. Liabilities-
Decline in cash and cash equivalents in 2024 suggests liquidity pressures.
Increased reliance on short-term borrowings in 2022 highlights a need for
immediate cash flow management.
2-Quick Ratio-
Growth in non-current investments indicates funds tied up in long-term assets,
which may impact short-term liquidity.
3-Working Capital-
Fluctuating trends in current liabilities versus assets suggest inconsistent
management of operational liquidity.
Solvency Analysis:
1-Debt-to-Equity Ratio-
Significant reduction in non-current liabilities by 2023 reflects
better long-term debt management.
Increase in shareholders’ funds until 2023 signals strengthening
equity base.
2-Interest Coverage-
Positive profitability post-2022 implies improved capacity to meet
interest obligations.
3-Long-Term Financial Stability-
Growth in non-current investments showcases focus on strategic
asset growth, but requires prudent management to avoid over-
leverage.
Profitability Analysis:
1-Revenue Trends-
Consistent growth from 2020 to 2023, followed by stagnation in
2024 (Rs. 1,588.93 Cr), raising concerns about maintaining
growth momentum. This stagnation could stem from intensified
market competition, inflationary pressures reducing consumer
spending, or challenges in scaling operations. Additionally, global
economic conditions, such as slower demand growth in key
markets or supply chain disruptions, might have contributed to
this plateau in revenue.
2-Net Profit Margins-
Improvement in profitability in 2023 (Rs. 213.74 Cr), but sharp
decline in 2024 to Rs. 61.51 Cr, indicating increased operational
pressures.
3-Return on Equity (ROE)-
Positive ROE in 2023 driven by profitability turnaround, though
reduced in 2024 due to expense escalation.
4-Earnings Per Share (EPS)-
Significant recovery in 2023 (Rs. 9.18), but drop in 2024 (Rs.
2.64) signals challenges in sustaining shareholder value.
Comprehensive Insights:
The financial analysis highlights strengths in long-term solvency
and strategic investments but underscores critical liquidity and
profitability challenges, particularly in 2024. A balanced focus on
operational efficiency, cost management, and liquidity
optimization is essential to address these concerns.
Key Observations:
A) Balance Sheet Analysis-
1-Shareholders' Funds:
Steady growth from 2020 to 2023 in reserves and surplus, peaking in 2023 (Rs.
1,734.61 Cr).
Decline observed in 2024 to Rs. 1,698.35 Cr.
2-Liabilities:
Significant reduction in non-current liabilities from 2022 to 2023, indicating
possible repayment of long-term debt.
Increase in short-term borrowings in 2022 indicates reliance on short-term debt for
liquidity.
3-Assets:
Growth in non-current investments from Rs. 903.61 Cr (2022) to Rs. 1,488.38 Cr
(2024), showcasing investment in long-term assets.
Decline in cash and cash equivalents in 2024, reflecting reduced liquidity.
B) Profit & Loss Statement-
1-Revenue Trends:
Revenue grew consistently from 2020 to 2023 but stagnated in 2024 (Rs. 1,588.93
Cr). This stagnation could stem from intensified market competition, inflationary
pressures reducing consumer spending, or challenges in scaling operations.
Additionally, global economic conditions, such as slower demand growth in key
markets or supply chain disruptions, might have contributed to this plateau in
revenue.
2-Profitability:
Losses observed in 2021 and 2022, turning profitable in 2023 (Rs. 213.74 Cr).
Decline in profit to Rs. 61.51 Cr in 2024 due to rising expenses.
3-Expenses:
Employee benefits and other expenses steadily increased, highlighting possible
inefficiencies or inflationary pressures.
Exceptional items caused significant losses in 2020 and 2022.
C) Earnings Per Share (EPS)-
Negative EPS from 2020 to 2022, primarily due to accumulated losses and
exceptional expenses.
Significant recovery in 2023 (Rs. 9.18), largely attributed to improved net profitability
following the company's strategic cost-cutting measures and better revenue
performance. However, the drop in 2024 (Rs. 2.64) indicates renewed challenges.
This decline can be linked to a combination of rising operational expenses and
stagnating revenue growth. Additionally, external factors such as inflationary
pressures and increased competition may have further eroded profit margins, thereby
impacting shareholder returns.
Negative EPS from 2020 to 2022.
Improved in 2023 (Rs. 9.18) but dropped significantly in 2024 (Rs. 2.64).
Overall Financial Position:
The company’s profitability improved post-2022, but declining
cash reserves and increasing expenses in 2024 pose concerns.
High non-current investments may indicate long-term growth
potential. To address liquidity and expense concerns, the
company could consider the following strategies:
1-Enhance Cash Flow Management-
Implement stricter credit policies to reduce the cash conversion cycle and improve
liquidity.
Optimize inventory levels to free up working capital without disrupting
operations.
2-Cost Control Measures-
Conduct a thorough review of operational expenses to identify areas for cost
reduction, such as streamlining supply chain processes or renegotiating supplier
contracts.
Invest in automation and technology to enhance operational efficiency and reduce
recurring costs.
3-Revenue Diversification-
Explore new revenue streams or market segments to mitigate dependency on
existing ones.
Increase focus on high-margin products or services to improve overall
profitability.
4-Prudent Investment Management-
Evaluate non-current investments for potential divestments that can generate
immediate cash inflows.
Prioritize strategic investments that yield higher returns in the medium-to-long
term.
5-Leverage External Financing-
Secure cost-effective financing options, such as low-interest loans or credit lines,
to address short-term liquidity challenges.
Explore opportunities for equity financing to strengthen the capital structure
without significantly increasing debt. The company’s profitability improved post-
2022, but declining cash reserves and increasing expenses in 2024 pose concerns.
High non-current investments may indicate long-term growth potential.
PART-3
Secondary Research: Cash Flow Statement Analysis
from Industry Peers
To perform a comprehensive secondary analysis, we reviewed
the cash flow statements of companies from three key
industries: FMCG (Fast Moving Consumer Goods), FMCD (Fast
Moving Consumer Durable), and BFSI (Banking, Financial Services
and Insurance). This allows us to benchmark the provided
financial data against industry peers, identifying trends,
anomalies, and opportunities. Below is a summary of the findings:
A. FMCG Sector
Peer Companies:
Hindustan Unilever (HUL)
Nestle India
Cash Flow Observations:
1-HUL (FY 2022–2023)-
Cash Flow from Operations: Rs. 7,500 Cr
Cash Flow from Investing: Rs. (2,000) Cr (Negative due to capital expenditures
and investments in R&D).
Cash Flow from Financing: Rs. (5,000) Cr (Primarily dividends and debt
repayment).
2-Nestle India (FY 2022–2023)-
Cash Flow from Operations: Rs. 3,200 Cr
Cash Flow from Investing: Rs. (1,000) Cr (Negative due to investments in new
factories and machinery).
Cash Flow from Financing: Rs. (1,200) Cr (Negative due to dividend payouts and
minimal borrowings).
Key Insights:
Positive operating cash flow is a consistent strength in the FMCG sector
due to steady consumer demand.
Heavy dividend payments and reinvestment in infrastructure (factories,
R&D) result in negative cash flows from financing and investing activities.
Companies rely less on debt due to strong cash flows from core operations.
B. FMCD Sector
Peer Companies:
Voltas Limited
Blue Star Limited
Cash Flow Observations:
1-Voltas (FY 2022–2023)-
Cash Flow from Operations: Rs. 1,800 Cr
Cash Flow from Investing: Rs. (400) Cr (Negative due to investments in new
products and supply chain).
Cash Flow from Financing: Rs. (1,100) Cr (Negative from dividend payouts and
debt servicing).
2-Blue Star (FY 2022–2023)-
Cash Flow from Operations: Rs. 900 Cr
Cash Flow from Investing: Rs. (600) Cr (Negative due to R&D and technological
upgrades).
Cash Flow from Financing: Rs. (200) Cr (Minimal negative due to repayment of
short-term borrowings).
Key Insights:
FMCD companies often exhibit moderate operating cash flow compared to
FMCG peers, reflecting the capital-intensive nature of their businesses.
Investing cash flow is negative, driven by the need for innovation and
maintaining a competitive edge in the market.
Financing activities are typically neutral or slightly negative, with limited
reliance on borrowing.
C. BFSI Sector
Peer Companies:
HDFC Bank
ICICI Bank
Cash Flow Observations:
1-HDFC Bank (FY 2022–2023)-
Cash Flow from Operations: ₹60,000 Cr
Cash Flow from Investing: ₹(50,000) Cr (Negative due to
investments in government securities and loans).
Cash Flow from Financing: ₹5,000 Cr (Positive due to equity
issuance and borrowings).
2-ICICI Bank (FY 2022–2023)-
Cash Flow from Operations: ₹70,000 Cr
Cash Flow from Investing: ₹(55,000) Cr (Negative due to large-
scale lending activities).
Cash Flow from Financing: ₹7,000 Cr (Positive from issuing bonds
and borrowing).
Key Insights:
BFSI companies generate massive operating cash flows due
to interest income and loan repayments.
Cash flow from investing is negative as funds are allocated
to loans and investments in financial assets.
Financing activities are usually positive due to equity
issuance or borrowing to meet credit demand.
