Earnings, cash flow and dividends

(1) The following item appeared in the financial section of a European newspaper:

Cash flow behind rise at Kerry KERRY GROUP, the west of Ireland-based meat, dairy and food ingredients company, achieved a 28 per cent increase in pre-tax profits to I£13.6 m (£12.8 m) for the six months to June 30. . . .

The profits increase was largely due to strong cash flow of I£29 m and lower interest rates in the US, UK and Ireland, where Kerry has a geographically even spread of business. . . .

Required Comment on the above news item. Under what circumstances does an increase in cash flow lead to an increase in profits?

(2) In an article on Tele-Communications Inc. (TCI), a major US cable-TV company, a business newspaper drew attention to the company’s high operating cash flow and the way it is employed:

Like many cable firms, TCI ploughs that cash back into the business instead of paying dividends: it has not made a profit [in the past four years].

Required

(a) What is the likely reason that TCI has a high operating cash flow but reports losses?

(b) The newspaper states that TCI could have paid a dividend but chose to ‘plough that cash back into the business’. Under what circumstances can a loss-making company pay a dividend?AppenedixLO1

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Exhibit 6.21 OMV Group: consolidated statement of income for 2000 In 000 1. 2. Sales, including petroleum excise tax Petroleum excise tax 3. Subtotal of items 1 to 2 (Net sales) 4. Changes in inventories of finished products, work in progress and services not yet invoiced 5. Other own work capitalised 6. Other operating income 7. Cost of material and services 8a. Personnel expenses 8b. Expenses for severance payments and pensions 9. Depreciation and amortisation 10. Other operating expenses 11. Subtotal of items 3 to 10 (Earnings before interest and tax) 12. Income from investments 13. 14. Other interest and similar income Income from other securities and loans shown under financial assets 15. Income from the disposal and write-up of financial assets and securities held as current assets 16. Expenses arising from financial investments and 17. securities held as current assets Interest and similar expenses 18. Subtotal of items 12 to 17 (Financial items) Income from ordinary activities 19. 20. Taxes on income 21. 22. Net income for the year Allocation to revenue reserve 23. Minority interests 24. Income brought forward 25. Unappropriated income 2000 9,218,454 (1,763,986) 7,454,468 6,907 19,078 86,372 (5,623,733) (409,695) (177,550) (320,063) (545,291) 490,493 16,737 15,870 37,524 1,989 (8,864) (101,013) (37,757) 452,736 (130,174) 322,562 (205,010) (1,448) 5 116,109