Saturday, June 25, 2016

The 15 greatest business rivalries of all time ...

 Courtesy : Rediff

Wadias and Ambani
There are several stories on how the war between the two started. Some say that it was a fight between old money and new money. Nusli Wadia had a business pedigree where as Dhirubhai, who started out as a petrol station attendant, had an amazing rags-to-riches story.His vaulting ambition, his appetite for risk and larger-than-life image made him a natural target for those who resented his meteoric rise to the top of the business ladder.During the Janata Party rule (1977- 1979), Nusli Wadia obtained the permission to build a 60000 tpa di-methyl terephtalate (DMT) plant.However, before his letter of intent could be converted into a license, the government changed and when the Congress government came to power, his license was delayed (until 1981) with one pretext or the other.This was the same time when Dhirubhai obtained license to build a PTA plant. Dhirubhai was also contemplating on building a Paraxylene facility.All this infuriated Wadia and it marked the beginning of the Ambani-Wadia battle where Ramnath Goenka, then Indian Express proprietor, joined forces with Wadia.

Shaw Wallace and UB Group
In the early 1980s, Vijay Mallya joined hands with Manu Chhabria to bid for Shaw Wallace. However, due to tight currency regulations at the time, Mallya didn’t come out in open about partnering Chhabria, a non-resident Indian.Chhabria took over Shaw Wallace, shrugged off Mallya's claim for the company and triggered one of India's most enduring corporate rivalries between Shaw Wallace and the UB Group.In 2005, UB Group signed a deal with Jumbo World Holdings Limited in Dubai to acquire Shaw Wallace for Rs 1,300 crore (Rs 13 billion).Around the time Mallya acquired Shaw Wallace, Manu Chhabria was already dead. Mallya dealt with his wife Vidya Chhabria.

Wadia and Rajan Pillai
As soon as the battle with Reliance had cooled off in the late 1980s, Nusli Wadia launched an all-out attack to acquire Britannia Industries. An American company named Nabisco Brands Inc owned Britannia then.Wadia’s friend Rajan Pillai was managing Britannia in all over Asia. He was called the 'Biscuit King'.Through Pillai, Wadia approached Nabisco’s management and expressed interest in acquiring Britannia but the offer was turned down.On the contrary, Nabisco made Pillai chairman of Britannia. Soon after, the two friends turned into bitter rivals.Pillai partnered French food company Danone to expand the business but the latter broke the partnership and joined hands with Wadia. Danone accused Pillai of fraud.After a long boardroom battle, Pillai ceded control to Wadia. and later Pillai died in prison.

Mukesh Ambani and Anil Ambani
Mukesh Ambani and Anil Ambani split their businesses between them after their father Dhirubhai Ambani died. There was lot of friction between the two since the split but it acquired new heights when the two brothers reached court over a dispute.Mukesh Ambani's Reliance Industries Limited agreed to sell Anil Ambani's Reliance Natural Resources Limited 80 mmscmd of gas from the Krishna-Godavari Basin for 17 years at $2.34 per mmbtu - for its Dadri power plant.With RIL stopped supplying the gas, RNRL went to court against RIL for not implementing this part of a family MoU signed when the empire was being carved up between the two brothers.The Supreme Court delivered a judgement which experts said was in favour of Mukesh Ambani.Few months after the court case, the two brother announced that they have scrapped all existing non-compete agreements, allowing either group to enter sectors that had earlier been reserved for one of them.In 2013, Ambani brothers joined hands for a telecom deal. Valued at Rs 1,200-crore, the deal lets Mukesh Ambani use his younger sibling's optic fibre network for launch of his telecom venture.
L&T and RIL
L&T’s tryst with the Ambanis started after Manu Chhabria, a takeover-tycoon, started making attempts to acquire L&T in 1987.No one person or institution was majority stakeholders in L&T, which made the company a sitting duck for acquisition.While Chhabria was acquiring shares of L&T, Dhirubhai Ambani too started buying the construction firm’s stocks. Then L&T Chairman NM Desai opted to join hands with Ambani, a fellow Gujarati, to prevent L&T falling in hands of Chhabria.The first battle was fought between Ambani and Chhabria. The latter lost due to Ambani’s political clout.Dhirubhai Ambani soon came on the board of L&T and became the chairman. L&T was a blue-chip and had easier access to cash. The engineering giant was just what the Ambanis needed to set up their cracker project without putting up the necessary funds.Soon after assuming control, Ambani forced L&T to grant supplier's credit of Rs 570 crore to reliance for its project.Ambani’s game, however, could not last long. They were forced to abort their plans after their arch-rival VP Singh came to power in Delhi in 1989. The management control was restored back to the institutions.

McDonalds and Burger King
Their rivalry is famous as Burger Wars. That’s because both the companies have been hitting out each other through their advertisements and marketing campaign.One famous advertisement is of Burger King attacking McDonald’s on the size of its hamburgers.In October, McDonalds announced it would stop serving Heinz ketchup in its stores. Why? Because Bernardo Hees, former chief executive of Burger King became chief executive of Heinz.
Tesco and Sainsbury’s
Tesco and Sainsbury’s are the two biggest retailers in the UK. Their battle is termed as Trolley Wars.
Sainsbury’s was started in 1869 and constantly grew to be the largest retailer in UK until 1995. Tesco, which was founded in 1919, overtook Sainsbury’s as the top UK retailer.
The two companies have been fighting it out in their advertisement and even while acquiring companies.

Apple and Microsoft
You can say that the original rivalry betwen Microsoft and Apple started with a court case.
Apple had agreed to license certain parts of its GUI to Microsoft for use in Windows 1.0, but when Microsoft made changes in Windows 2.0 adding overlapping windows and other features found in the Macintosh GUI, Apple filed suit, according to Wikipedia.Apple added additional claims to the suit when Microsoft released Windows 3.0.The court’s decision was largely in favour of Microsoft.Since then, the two companies have been talking negative about each other’s products. For example, Apple CEO Tim Cook to analyst during the company’s earning call: "I haven't personally played with the Surface yet… but what we're reading about it that it's a fairly compromised, confusing product." On the other hand, Microsoft Surface tablet’s advertisement shows things iPad cannot do and makes fun of Siri.
Adidas and Puma
Adidas was founded in 1948 in Germany by Adolf Dassler, after splitting from his elder brother Rudolf - who later established Puma.The brothers’ relationship went sour during the World War II. After the war was over they went their separate ways.Puma and Adidas entered a fierce and bitter rivalry after the split. The town of Herzogenaurach (where they lived) was divided on the issue, leading to the nickname "the town of bent necks". That’s because people looked down to see which shoes strangers wore before talking to them, according to Wikipedia.In 2009 employees of both the companies played a friendly soccer match symbolising end of the 60-year-old feud. However, both the Dassler brothers had passed away by this time.

Airbus and Boeing
In the large jet airliner business, it’s only two companies that rule the roost - Airbus and Boeing.
Though the companies have been competing for a long time, the battle got intense when global airspace industry got consolidated after both the companies went on merger and acquisition spree in the 1990s.
The two are engaged in neck and neck completion. From 2003 - 2012, Airbus has received 7,714 orders and delivered 4,503, and Boeing has received 7,312 orders and delivered 4,091, according to Wikipedia.Both the companies regularly accuses the other of receiving unfair state aid from their respective governments.In fact, in May 2005 the United States filed a case with World Trade Organisation against the European Union for providing allegedly illegal subsidies to Airbus. Twenty-four hours later the European Union filed a complaint against the United States protesting support for Boeing.

Sky and BT
Sky and BT have been battling each other in the broadband market for a long time. But the rivalry reached new heights after BT started bidding for Premier League football licenses.To take away Sky's loyal football fans, BT launched a huge marketing campaign using a range of celeb presenters. BT's move into Premier League football has sent license fees rocketing, which has dented Sky's profits.

Procter & Gamble and Unilever
FMCG companies Unilever and Procter & Gamble (P&G) dominate the global consumer goods market. The rivalry between the two got intense after the Anglo-Dutch company Unilever entered the US market.The competition between the two is so intense that P&G had hired espionage agents to spy on Unilever and get information on the hair care business. The agents were caught and P&G paid Unilever $10 million.At one point, P&G had confessed looking through Unilever’s trash for information on its products and strategy.Unilever has brands such as Dove, Axe, Vaseline, Lux, Ponds, and Sunsilk.P&G is equipped with brands such as Head & Shoulder, Olay, Pantene, Gillette, Oral-B, and Ariel.

Apple and Samsung
Apple gave the world its first true touch screen smartphone. It pioneered the concept and turned the innovation into booming profit. Then came along a powerful Asian manufacturer Samsung electronics.
Using Google’s Android software it created smartphones and tablets that were similar to Apple products. It slowly started gaining market share, hurting Apple’s margins.In turn, Apple launched patent infringement suits and got the verdict partially in its favour. The Korean rival, however, flooded the market with products that rivalled Apple’s and were cheaper.Last quarter, Samsung managed to sell almost three times as many smartphones as rival Apple, according to Gartner.

Energiser and Duracell
Duracell was the first ever company to introduce an alkaline battery into the market but in 1959 the Energiser battery was introduced by Eveready. Competitive products started the rivalry that has lasted over 50 years now.In 1970, Duracell created an ad campaign featuring the Duracell bunny - the Energiser bunny followed very quickly, and much to Duracell's annoyance, became the more memorable mascot.
Coke and Pepsi
It will be apt to call the rivalry between Coke and Pepsi as a war. In fact, their advertising campaign targeting each other is called Cola Wars.Pepsi adverts often focus on celebrities choosing Pepsi over Coca-Cola, supporting Pepsi's positioning as the soft drink for the new generation.Since 1975, Pepsi started showing people in blind taste tests called the Pepsi Challenge. In this campaign. consumers are blindfolded and asked to choose the Cola they like from different available and most of them choose Pepsi.The war even went to space. In 1985, Coca-Cola and Pepsi were launched into space aboard the Space Shuttle Challenger.The companies had designed special cans to test packaging and dispensing techniques for use in zero G conditions. However, none of their units worked as expected, according to Wikipedia.

Saturday, June 11, 2016

10 Tips for the Successful Long-Term Investor

Courtesy : Investopedia

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

1. Sell the Losers and Let the Winners Ride!

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:
  • Riding a Winner - Peter Lynch was famous for talking about "tenbaggers", or investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple - say three, for instance - you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule - if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting. 
  • Selling a Loser - There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgment of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater.
In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses

2. Don't Chase a "Hot Tip."

Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

3. Don't Sweat the Small Stuff.

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

4. Don't Overemphasize the P/E Ratio.

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

5. Resist the Lure of Penny Stocks.

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6. Pick a Strategy and Stick With It.

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

7. Focus on the Future.

The tough part about investing is that we are trying to make informed decisions based on things that have yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8. Adopt a Long-Term Perspective.

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Neither investing style is necessarily better than the other - both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education and desire.

9. Be Open-Minded.

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Index, and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10. Be Concerned About Taxes, but Don't Worry.

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision .

The Bottom Line

There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.

Saturday, May 28, 2016

Due Diligence In 10 Easy Steps

 Courtesy : Investopedia

You sit down at your computer with a fresh cocktail napkin or sticky note that has a single ticker scribbled across it - it's a ticker you've never researched before, but something (or someone) has piqued your interest. This article will discuss 10 steps you should take on your first tour through a new stock. This due diligence allows you to gain essential information and vet out a possible new investment.
The steps are organized so that each new piece of information will build upon what has been previously learned. In the end, following these steps will give you a balanced view of the pros and cons of your investment idea, and allow you to make a rational, logical decision.

Step 1 - The Capitalization of the Company 
It really helps to form a mental picture or diagram of a newly researched company and the first step is to determine just how big the company is. The market capitalization says a lot about how volatile the stock is likely to be, how broad the ownership might be and the potential size of the company's end markets. For example, large cap and mega cap companies tend to have more stable revenue streams and less volatility. Mid cap and small cap companies, meanwhile, may only serve single areas of the market, and may have more fluctuations in their stock price and earnings. No judgments should be made at this step; we are just accumulating information that will set the stage for everything to come. When you start to examine revenue and profit figures, the market cap will give you some perspective.

Step 2 - Revenue, Profit and Margin Trends
When beginning to look at the numbers, it may be best to start with the revenue, profit and margin (RPM) trends.Look up the revenue and net income trends for the past two years at a general finance . These should have links to quarterly (for the past 12 months) and annual reports (past three years). A quick calculator check could be done to confirm the price-to-sales (P/S) ratio and the price-to-earnings (P/E) ratio. Look at the recent trends in both sets of figures, noting whether growth is choppy or consistent, or if there any major swings (such as more than 50% in one year) in either direction.
Margins should also be reviewed to see if they are generally rising, falling, or remaining the same. This information will come into play more during the next step. 

Step 3 - Competitors and Industries
Now that you have a feel for how big the company is and how much money it earns, it's time to size up the industries it operates in and who it competes with. Compare the margins of two or three competitors. Every company is partially defined by who it competes with. Looking at the major competitors in each line of business (if there is more than one) may help you nail down just how big the end markets for products are.Information about competitors can be found in company profiles on most major research sites, usually along with their ticker or direct comparisons that let you review a list with certain metrics filled in for both the company you're researching and its competitors. If you're still uncertain of how the company's business model works, you should look to fill in any gaps here before moving further along. Sometimes just reading about some of the competitors may help to understand what your target company actually does. 

Step 4 - Valuation Multiples
Now it's time to get to the nitty-gritty of P/Es, price/earnings to growth (PEGs) ratio, and the like - for both the company and its competitors. Note any large discrepancies between competitors for further review. It's not uncommon to become more interested in a competitor during this step, which is perfectly fine, but still look to follow through with the original due diligence while noting the other company for further review down the road.

P/E ratios can form the initial basis for looking at valuations. While earnings can and will have some volatility (even at the most stable companies), valuations based on trailing earnings or on current estimates are a yardstick that allows instant comparison to broad market multiples or direct competitors. Basic "growth stock" versus "value stock" distinctions can be made here along with a general sense of how much expectation is built into the company. It's generally a good idea to examine a few years' worth of net earnings figures to make sure most recent earnings figure (and the one used to calculate the P/E) is normalized, and not being thrown off by a large one-time adjustment or charge.
Not to be used in isolation, the P/E should be looked at in conjunction with the price-to-book (P/B) ratio, the enterprise multiple and the price-to-sales (or revenue) ratio. These multiples highlight the valuation of the company as it relates to its debt, annual revenues, and the balance sheet. Because ranges in these values differ from industry to industry, reviewing the same figures for some competitors or peers is a key step. Finally, the PEG ratio brings into account the expectations for future earnings growth, and how it compares to the current earnings multiple. Stocks with PEG ratios close to 1 are considered fairly valued under normal market conditions.

Step 5 - Management and Share Ownership
Is the company still run by its founders? Or has management and the board shuffled in a lot of new faces? The age of the company is a big factor here, as younger companies tend to have more of the founding members still around. Look at consolidated bios of top managers to see what kind of broad experiences they have; this information may be found on the company's website or on exchange filings.
Also look to see if founders and managers hold a high proportion of shares, and what amount of the float is held by institutions. Institutional ownership percentages indicate how much analyst coverage the company is getting as well as factors influencing trade volumes. Consider high personal ownership by top managers as a plus, and low ownership a potential red flag. Shareholders tend to be best served when the people running the company have a stake in the performance of the stock. 

Step 6 - Balance Sheet Exam
Many articles could easily be devoted to just the balance sheet, but for our initial due diligence purposes a cursory exam will do. Look up a consolidated balance sheet to see the overall level of assets and liabilities, paying special attention to cash levels (the ability to pay short-term liabilities) and the amount of long-term debt held by the company. A lot of debt is not necessarily a bad thing, and depends more on the business model than anything else. Some companies (and industries as a whole) are very capital intensive, while others require little more than the basics of employees, equipment and a novel idea to get up and running. Look at the debt-to-equity ratio to see how much positive equity the company has going for it; you can then compare this with the competitors to put the metric into better perspective. 

If the "top line" balance sheet figures of total assets, total liabilities and stockholders' equity change substantially from one year to the next, try to determine why. Reading the footnotes that accompany the financial statements and the management's discussion in the quarterly/annual report can shed some light on the situation. The company could be preparing for a new product launch, accumulating retained earnings or simply whittling away at precious capital resources. What you see should start to have some deeper perspective after having reviewed the recent profit trends. 

Step 7 - Stock Price History
At this point you'll want to nail down just how long all classes of shares have been trading, and both short-term and long-term price movement. Has the stock price been choppy and volatile, or smooth and steady? This outlines what kind of profit experience the average owner of the stock has seen, which can influence future stock movement. Stocks that are continuously volatile tend to have short-term shareholders, which can add extra risk factors to certain investors.

Step 8 - Stock Options and Dilution Possibilities
Next, investors will need to dig into the exchange  filings  to see all outstanding stock options as well as the conversion expectations given a range of future stock prices. Use this to help understand how the share count could change under different price scenarios. While employee stock options are potentially a powerful motivator, watch out for shady practices like re-issuing of "underwater" options or any formal investigations that have been made into illegal practices like options backdating. 

Step 9 - Expectations
This is a sort of a "catch all", and requires some extra digging. Investors should find out what the consensus revenue and profit estimates are for the next two to three years, long-term trends affecting the industry and company specific details about partnerships, joint ventures, intellectual property, and new products/services. News about a product or service on the horizon may be what initially turned you on to the stock, and now is the time to examine it more fully with the help of everything you've accumulated thus far.

Step 10 - Risks
Setting this vital piece aside for the end makes sure that we're always emphasizing the risks inherent with investing. Make sure to understand both industry-wide risks and company-specific ones. Are there outstanding legal or regulatory matters, or just a spotty history with management? Is the company eco-friendly? And, what kind of long-term risks could result from it embracing/not embracing green initiatives? Investors should keep a healthy devil's advocate going at all times, picturing worst-case scenarios and their potential outcomes on the stock. 

Once you've completed these steps you should be able to wrap your mind around what the company has done so far, and how it might fit into a broad portfolio or investment strategy. Inevitably you'll have specifics that you will want to research further, but following these guidelines should save you from missing something that could be vital to your decision. Veteran investors will throw many more investment ideas (and cocktail napkins) into the trash bin than they will keep for further review, so never be afraid to start over with a fresh idea and a new company. There are literally tens of thousands of companies out there to choose from!

Thursday, May 26, 2016


Company reported a turnover of Rs.49.37 Cr ( Rs.65.37 Cr in last year same period.) and a net loss of Rs.56 Lac ( Profit of Rs.7.86 Cr ) in March quarter . For the year ended FY 2015-16 , top-line is Rs.300.45 Cr and a net profit of Rs.24.86 Cr . Compared with last March Quarter , other income decreased from Rs.9.64 Cr to Rs.43 Lac. Normally ,major part of  other income of company includes Export subsidy from government , exchange rate fluctuation (gain/loss),sale of by-product ..etc

Result Link HERE

Saturday, May 21, 2016

The Essentials Of Corporate Cash Flow

 Courtesy : Investopedia

If a company reports earnings of $1 billion, does this mean it has this amount of cash in the bank? Not necessarily. Financial statements are based on accrual accounting, which takes into account non-cash items. It does this in an effort to best reflect the financial health of a company. However, accrual accounting may create accounting noise, which sometimes needs to be tuned out so that it's clear how much actual cash a company is generating. The statement of cash flow provides this information, and here we look at what cash flow is and how to read the cash flow statement. 

What Is Cash Flow?
Business is all about trade, the exchange of value between two or more parties, and cash is the asset needed for participation in the economic system. For this reason - while some industries are more cash intensive than others - no business can survive in the long run without generating positive cash flow per share for its shareholders. To have a positive cash flow, the company's long-term cash inflows need to exceed its long-term cash outflows.
An outflow of cash occurs when a company transfers funds to another party (either physically or electronically). Such a transfer could be made to pay for employees, suppliers and creditors, or to purchase long-term assets and investments, or even pay for legal expenses and lawsuit settlements. It is important to note that legal transfers of value through debt - a purchase made on credit - is not recorded as a cash outflow until the money actually leaves the company's hands.
A cash inflow is of course the exact opposite; it is any transfer of money that comes into the company's possession. Typically, the majority of a company's cash inflows are from customers, lenders (such as banks or bondholders) and investors who purchase company equity from the company. Occasionally cash flows come from sources like legal settlements or the sale of company real estate or equipment. 

Cash Flow vs Income
It is important to note the distinction between being profitable and having positive cash flow transactions: just because a company is bringing in cash does not mean it is making a profit (and vice versa).
For example, say a manufacturing company is experiencing low product demand and therefore decides to sell off half its factory equipment at liquidation prices. It will receive cash from the buyer for the used equipment, but the manufacturing company is definitely losing money on the sale: it would prefer to use the equipment to manufacture products and earn an operating profit. But since it cannot, the next best option is to sell off the equipment at prices much lower than the company paid for it. In the year that it sold the equipment, the company would end up with a strong positive cash flow, but its current and future earnings potential would be fairly bleak. Because cash flow can be positive while profitability is negative, investors should analyze income statements as well as cash flow statements, not just one or the other.
What Is the Cash Flow Statement?
There are three important parts of a company's financial statements: the balance sheet, the income statement and the cash flow statement. The balance sheet gives a one-time snapshot of a company's assets and liabilities . And the income statement indicates the business's profitability during a certain period.
The cash flow statement differs from these other financial statements because it acts as a kind of corporate checkbook that reconciles the other two statements. Simply put, the cash flow statement records the company's cash transactions (the inflows and outflows) during the given period. It shows whether all those lovely revenues booked on the income statement have actually been collected. At the same time, however, remember that the cash flow does not necessarily show all the company's expenses: not all expenses the company accrues have to be paid right away. So even though the company may have incurred liabilities it must eventually pay, expenses are not recorded as a cash outflow until they are paid (see the section "What Cash Flow Doesn't Tell Us" below).
The following is a list of the various areas of the cash flow statement and what they mean:
  • Cash flow from operating activities - This section measures the cash used or provided by a company's normal operations. It shows the company's ability to generate consistently positive cash flow from operations. Think of "normal operations" as the core business of the company. For example, Microsoft's normal operating activity is selling software.
  • Cash flows from investing activities - This area lists all the cash used or provided by the purchase and sale of income-producing assets. If Microsoft, again our example, bought or sold companies for a profit or loss, the resulting figures would be included in this section of the cash flow statement.
  • Cash flows from financing activities - This section measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is servicing debt but can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.
When you look at a cash flow statement, the first thing you should look at is the bottom line item that says something like "net increase/decrease in cash and cash equivalents", since this line reports the overall change in the company's cash and its equivalents (the assets that can be immediately converted into cash) over the last period. If you check under current assets on the balance sheet, you will find cash and cash equivalents (CCE or CC&E). If you take the difference between the current CCE and last year's or last quarter's, you'll get this same number found at the bottom of the statement of cash flows.
In the sample Microsoft annual cash flow statement (from June 2004) shown below, we can see that the company ended up with about $9.5 billion more cash at the end of its 2003/04 fiscal year than it had at the beginning of that fiscal year (see "Net Change in Cash and Equivalents"). Digging a little deeper, we see that the company had a negative cash outflow of $2.7 billion from investment activities during the year (see "Net Cash from Investing Activities"); this is likely from the purchase of long-term investments, which have the potential to generate a profit in the future.Generally, a negative cash flow from investing activities are difficult to judge as either good or bad - these cash outflows are investments in future operations of the company (or another company); the outcome plays out over the long term. 


The "Net Cash from Operating Activities" reveals that Microsoft generated $14.6 billion in positive cash flow from its usual business operations - a good sign. Notice the company has had similar levels of positive operating cash flow for several years. If this number were to increase or decrease significantly in the upcoming year, it would be a signal of some underlying change in the company's ability to generate cash. 

Digging Deeper into Cash Flow
All companies provide cash flow statements as part of their financial statements, but cash flow (net change in cash and equivalents) can also be calculated as net income plus depreciation and other non-cash items.
Generally, a company's principal industry of operation determine what is considered proper cash flow levels; comparing a company's cash flow against its industry peers is a good way to gauge the health of its cash flow situation. A company not generating the same amount of cash as competitors is bound to lose out when times get rough.
Even a company that is shown to be profitable according to accounting standards can go under if there isn't enough cash on hand to pay bills. Comparing amount of cash generated to outstanding debt, known as the operating cash flow ratio, illustrates the company's ability to service its loans and interest payments. If a slight drop in a company's quarterly cash flow would jeopardize its loan payments, that company carries more risk than a company with stronger cash flow levels.
Unlike reported earnings, cash flow allows little room for manipulation. Every company filing reports with the Securities and Exchange Commission (SEC) is required to include a cash flow statement with its quarterly and annual reports. Unless tainted by outright fraud, this statement tells the whole story of cash flow: either the company has cash or it doesn't.

What Cash Flow Doesn't Tell Us

Cash is one of the major lubricants of business activity, but there are certain things that cash flow doesn't shed light on. For example, as we explained above, it doesn't tell us the profit earned or lost during a particular period: profitability is composed also of things that are not cash based. This is true even for numbers on the cash flow statement like "cash increase from sales minus expenses", which may sound like they are indication of profit but are not.
As it doesn't tell the whole profitability story, cash flow doesn't do a very good job of indicating the overall financial well-being of the company. Sure, the statement of cash flow indicates what the company is doing with its cash and where cash is being generated, but these do not reflect the company's entire financial condition. The cash flow statement does not account for liabilities and assets, which are recorded on the balance sheet. Furthermore accounts receivable and accounts payable, each of which can be very large for a company, are also not reflected in the cash flow statement.
In other words, the cash flow statement is a compressed version of the company's checkbook that includes a few other items that affect cash, like the financing section, which shows how much the company spent or collected from the repurchase or sale of stock, the amount of issuance or retirement of debt and the amount the company paid out in dividends.
The Bottom Line
Like so much in the world of finance, the cash flow statement is not straightforward. You must understand the extent to which a company relies on the capital markets and the extent to which it relies on the cash it has itself generated. No matter how profitable a company may be, if it doesn't have the cash to pay its bills, it will be in serious trouble.
At the same time, while investing in a company that shows positive cash flow is desirable, there are also opportunities in companies that aren't yet cash-flow positive. The cash flow statement is simply a piece of the puzzle. So, analyzing it together with the other statements can give you a more overall look at a company' financial health. Remain diligent in your analysis of a company's cash flow statement and you will be well on your way to removing the risk of one of your stocks falling victim to a cash flow crunch.


Tweet TopOfBlogs