Can you provide a case reflection for: Company 1 (Home Depot): Merchandise inventories in the Operating portion of the CFS hint at this being a company selling goods- perhaps FMCG (fast moving consumer goods). This was one of the more challenging companies and sectors to guess. Company 2 (General Electric) Generating losses for the last 3 years. It has reported goodwill impairments in each of the three years, but a particularly large impairment was reported in 2018 ($7.3b), exacerbating the loss. GE has its roots in manufacturing. It has been well publicized as struggling in many areas. It appears much of the losses reflects a deterioration in business conditions for the company. The pension amounts reflect the non-cash pension cost, and then the outlays the company is setting aside to fund future pension outlays. In 2019, it cut back dramatically on pension funding. The company is selling businesses, and assets. As a result, it is generating positive cash from investing activities due to these sales. It seems to be selling assets to generate cash flow and to also pay down debt. Extra cash from sale of assets is being used to pay off debt. What might this reflect? The debt could be tied to the assets sold, or it could reflect an effort to cut back the companys leverage and financial risks given the decline in business conditions. Dividends have been cut twice. How significant is it for a company to cut its dividend? Cutting a dividend is serious as it signals to some investors who buy dividend stocks to exit this stock. Many of these investors can be pension funds and other investors who want stocks with dividends. Therefore cutting a dividend is not undertaken lightly. What stage in its life does company 2 appear to be? It appears to be at a post high growth stage and at a stage of declineefforts seem linked to efforts to restart its growth cycle. Jury is out as to how successful they will be. Company 2 is a great company to explore how various elements impact the CFS: Assets: 3 Increase in Accounts Receivable (AR)- represent cash outflow i.e. we are receiving less cash for purchases as more people buy on credit. The Sales on credit are recognized but as it is not for cash there is no flow of cash into the CFS. Increase in Prepaid Expense (PE)- represent a cash outflow as we are paying in advance. While it may at face value seem like a simple strategy to simply never do this, sometimes doing so is key to success e.g. winning a bid to open a business in a key location as the winning bid needed rent paid in advance. Context matters. Similar steps for Inventory and PPE (Property, Plant and Equipment)- an increase in these, in general is seen as an outflow of cash. The reverse is true- example- a decrease in AR means customers are paying us and cash is flowing in. This has a positive effect on the cash flow statement. Liabilities: An increase in Accrued Liabilities (AL) or Accounts Payable (AP) means we are paying out less and delaying paying for items. Cash is preserved. Therefore this has a positive effect on cash flows in general. If we pay down AL and AP, cash has to flow out to pay these amounts we owe and it is recorded as an outflow in the CFS. How one actually manages current liabilities like AP and AL and current assets like PE and AR depends on context and strategy. It is not as simple as a business should simply increase accounts payable and decrease prepaid expenses as an example. The context, reputation and business strategy plays a role in how and what one actually does. We are just learning the various levers we have at our disposal. The tools above simply share that management judgement is key in managing the cash conversion cycle. Task: Do your own research online and look at your own articles you can find on the cash conversion cycle and how this can be an advantage in the right context. Explore the model of Dell computers as an example that gets payment first and then builds a laptop- cash comes in first. Why is this such a competitive advantage versus traditional computer manufacturers that first buy inventory and assemble a laptop and then place it in a store? Lesson: having a great product and strategy is key- however, managing cashflow can become a competitive advantage, like in the case of Dell, to help a profitable business continue to sustainably and successfully grow. 4 Company 3 (Uber) Negative earnings for two of the last three years, cash flows from operations are negative in all three years. The company reports limited depreciation (and purchase of LT assets), holds no inventory, and has low receivable changes. As a result, it is able to use unpaid insurance and accrued expenses to lower working capital needs. It has not been undertaking much in the way of investing. But each year its financing needs have grown. Is this a cause for concern? How is it funding these cash shortfalls? Issued convertible debt in 2017 and 2018, raised new debt in 2018, and common stock issue in 2019. So the financial market seems to be looking relatively favorably on the company and willing to fund its cash needs. Paying no dividends and making no stock repurchases is in keeping with the usual approach for a high growth company that needs all retained earningsto re-invest in the business Suggests a growth business where the market is willing to invest for the upside. Overview of the Three Companies Lets explore a scenario- think through your approach: Assuming the businesses of both companies 2 and 3 are negatively affected by the coronavirus pandemic, which is in the best position to survive? Why? Which has the most cash available to buffer against shocks? Will the market continue to support company 3? Company 3 seems to have fewer cash needs for working capital or fixed assets? Can company 2 continue to raise cash by selling assets? These are the type of questions investors and bankers ask before either investing or loaning funds to a business. Will the company be able to pay off any debt or obligations if there is a shock. How resilient is a business? During COVID-19, those organizations with cash were much more secure in terms of riding out any challenges or exit of customers. The CFS is a key statement that therefore offers insight into how efficient the business is at making a profit. The Income Statement is a window into the actual profit, but the CFS is key in terms of looking at how efficient the overall business is in terms of generating that profit. 5 General Assessment of Cash Flow Statements and Analysis Lets step back from the details of specific company cash flow statements. What can we generally learn from analyzing the cash flow statement? What would you look for? Note the importance of context. Company 2 and 3 generated negative earnings, but we were much more concerned about the losses in company 2 because we saw it as a mature company and the losses signaled to us a deterioration in its business conditions. In contrast, company 3 was seen as a start-up company and the market was more positive about financing negative cash flows. Closing We have been able to learn quite a lot about the economic viability and of the company by looking at its cash flow statement. The CFS is often the last of the big 3 core statements many look at. While the Income Statement is a Retained Earnings engine, the CFS is the oil that ensures that engine runs smoothly and does not cease up