CFA Program Level I for November 2024 $ & '

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K Home ) # Cash Flow Statement Analysis: Cash Flow Ratios 3 4 7 6

Lessons Table of Contents Confidence Levels Notes Bookmarks Highlights Cash Flow Statement Analysis:
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r Practice CASH FLOW STATEMENT ANALYSIS: CASH FLOW RATIOS

v Mock Exams
Learning Outcome
j Game Center calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage
cash flow ratios
e Discussions
Ratios based on information in statements of cash flows can be used to compare the performance and
B Search prospects of different companies in an industry and of different industries. These ratios generally fall into
cash flow performance (profitability) ratios and cash flow coverage (solvency) ratios. Exhibit 9 summarizes
the calculation and interpretation of some of these ratios.

Exhibit 9: Cash Flow Ratios

Performance
Ratios Calculation What It Measures

Cash flow to Operating cash generated per dollar of

revenue CFO ÷ Net revenue revenue
Cash return on Operating cash generated per dollar of
assets CFO ÷ Average total assets asset investment
Cash return on Operating cash generated per dollar of
equity CFO ÷ Average shareholders’ equity owner investment
Cash to
income CFO ÷ Operating income Cash generating ability of operations
Cash flow per (CFO – Preferred dividends) ÷ Number of Operating cash flow on a per-share
sharea common shares outstanding basis

Coverage
Ratios Calculation What It Measures

Debt coverage CFO ÷ Total debt Financial risk and financial leverage
Interest (CFO + Interest paid + Taxes paid) ÷
coverageb Interest paid Ability to meet interest obligations
Ability to acquire assets with operating cash
Reinvestment CFO ÷ Cash paid for long-term assets flows
CFO ÷ Cash paid for long-term debt
Debt payment repayment Ability to pay debts with operating cash flows
Dividend Ability to pay dividends with operating cash
payment CFO ÷ Dividends paid flows
Investing and CFO ÷ Cash outflows for investing and Ability to acquire assets, pay debts, and make
financing financing activities distributions to owners
Notes:

a If the company reports under IFRS and includes total dividends paid as a use of cash in the operating section, total dividends should be
added back to CFO as reported and then preferred dividends should be subtracted. Recall that CFO reported under US GAAP and IFRS
may differ depending on the treatment of interest and dividends, received and paid.
b If the company reports under IFRS and included interest paid as a use of cash in the financing section, then interest paid should not be
added back to the numerator.

EXAMPLE 3

A Cash Flow Analysis of Comparables

1. Andrew Potter is analyzing operating cash flow trends for Microsoft and Apple, which are presented
in Exhibits 10 and 11.

Exhibit 10: Cash Flow from Operating Activities as a Percentage of

Total Net Revenue

2017 2016 2015

Microsoft 43.9% 39.1% 31.7%

Apple Inc. 27.7% 30.5% 34.8%

Exhibit 11: Cash Flow from Operating Activities as a Percentage of

Average Total Assets

2017 2016 2015

Microsoft 18.2% 18.1% 17.1%

Apple Inc. 18.2% 21.5% 31.1%

What is Potter most likely to conclude about the relative operating cash-flow-generating ability of
these two companies?

Hide Solution

Solution:

On both measures—operating cash flow divided by revenue and operating cash flow divided by
assets—both companies have overall strong results. However, Microsoft has higher cash flow
from operating activities as a percentage of revenues in both 2016 and 2017. Further, Microsoft
has an increasing trend. While Apple had a higher operating cash flow as a percent of revenue
in 2015 compared to Microsoft, it has had a declining trend and was below Microsoft in the two
more recent years. Microsoft’s operating cash flow relative to assets is the same as Apple’s in
2017 and relatively stable with a slight increase since 2015. Apple started the three years with a
much stronger ratio but saw a declining trend such that its ratio is now at the same level as
Microsoft. We should note that this ratio is heavily influenced by substantial investments in
financial instruments that Apple has made over the years due to its strong historic cash flow.

OPTIONAL UNTESTED SEGMENT

UNLOCKING REAL-WORLD APPLICATIONS WITH BLOOMBERG

Bloomberg is one of the main market data platforms used globally by finance professionals throughout their
workflows. In this optional section, we will explore a real-world application of the CFA Curriculum on
Bloomberg.

{FLDS} FIELD SEARCH

The Bloomberg FLDS function allows you to view the free cash flow to the firm (FCFF), free cash flow to
equity (FCFE), and cash flow coverage ratios for any public company.

“FLDS <GO> is your hub for exploring Bloomberg data, providing a breadth of fields for legacy
APIs, calcrts, and the Bloomberg Query Language (BQL) in one centralized location. You can
combine a security and a mix of keywords to scan all data fields, overrides, and parameter values
available to your research and models on the Bloomberg Terminal® and Microsoft Excel.” -
Bloomberg

To explore this function, type FLDS into the Bloomberg command line and press Enter or <GO>. Type a
security – such as Apple Inc. (or AAPL US Equity) – into the top left amber field. Then type “cash flow” in the
amber Enter Query field below the security, and press Enter or <GO>. View the cash flow metrics for the
selected firm.
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Analyzing Statements of Cash

Flows II

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