This week we are studying the statement of cash flows. Operating cash flow represents the cash that flows in and out of the company on a day-to-day basis. For example, cash inflows come from collected revenues and cash outflows occur when the firm pays its normal day-to-day expenses. We, of course, would prefer to see a positive total on the net cash provided by operating activities, because it implies that cash inflows are greater than cash outflows. In your textbook, the author discusses 4 financial ratios associated with operating cash flows; please study these ratios. Remember that the denominator on the ratio operating cash flow/current maturities of long-term debt is being revised to current liabilities; therefore, we will report the ratio as operating cash flow/current liabilities.

This week, find the statement of cash flow for a firm of your choosing and report the cash flow ratios. Please report and discuss 3 years of ratios for the three ratios related to debt and dividends but only the current year’s cash flows per share. Show numerators and denominators for all ratios and then discuss their economic meaning. It is possible that your firm does not pay dividends (you will see dividends in the financing section of the cash flow statement).

The cash flow per share ratio is particularly challenging since most of the numbers in the statements are in thousands or millions (look at the top of the statement for a note) while the number of shares outstanding only for the current year (in yahoo.finance, under your firm’s page, look in “Key Statistics” and you will find the number of shares in the right-hand column about halfway down the page). You only have to report ONE YEAR on the cash flow per share. Please do not report on Nike, as that will be the firm posted as an example. Again, please do not duplicate firms by including the name of your chosen firm in the title to your post. Also, please respond to questions/comments from your instructor regarding your post.

Here is the example:

I went to Finance.Yahoo.com to retrieve information needed to compute the ratios. I found Net operating cash flows and cash dividends paid on the Statement of Cash Flow; I found current liabilities and total liabilities on the Balance Sheet and I found the # of shares outstanding (only available for the current year) in Key Statistics in finance.yahoo. Here are my results:

Operating cash flow/Current liabilities:

2012: 1,899/3,865 = .491

2011: 1,812/3,958 = .458

2010: 3,164/3,364 = .941

Analysis: This ratio has deteriorated significantly from 2010 to 2011 and then there was slight improvement from 2011 to 2012. Overall, this ratio pattern indicates that the firm is less able to meet its current debt obligations when compared to its 2010 levels. Keep in mind that operating cash flows include payments on current liabilities so we should not assume that the firm cannot meet its obligations if this ratio is less than 1. Instead we can only make comparisons from year to year and make statements on relative ability to meet short-term obligations.

Operating cash flow/total debt:

2012: 1,899/5,084 = .374

2011: 1,812/5,155 = .352

2010: 3,164/4,665 = .678

Analysis: Keep in mind that a firm will likely NOT generate enough operating cash flow to cover all of its liabilities. Again, we can only form conclusions associated with the firm’s relative position in meeting its total liabilities. Like the previous ratio, this ratio tells us that there was significant deterioration from 2010 to 2011 and slight improvement from 2011 to 2012 in the firm’s ability to meet its total liabilities.

Operating cash flow/share (notice that I’m adding the 0’s from each number to get this ratio correct!):

2012: 1,899,000,000/450,550,000 = $4.21

2011 & 2010: (n/a – yes, I could find this number, but if you wish to skip this search, feel free)

Analysis: This ratio is a complement to the earnings per share ratio, which was $4.60 (diluted).

Our textbook author implies that EPS has some distortions due to accrual accounting as well as financing and investing cash flows so the operating cash flow is a “purer” version of EPS.

Operating cash flow/Cash dividends

2012: 1,899/619 = 3.067

2011: 1,812/555 = 3.265

2012: 3,164/505 = 6.265

Analysis: This ratio tells you how able the firm is to cover its cash dividends with its operating cash flows. Even though Nike’s ratio has steadily declined, it is still able to make its dividend payment several times with its operating cash flow. Given that the company has many other sources of funds, this ratio is good overall.

The cash flow per share ratio is particularly challenging since most of the numbers in the statements are in thousands or millions (look at the top of the statement for a note) while the # of shares outstanding only for the current year (in Yahoo.Finance, under your firm’s page, look in “Key Statistics” and you will find the # of shares in the right column down about halfway on the page). You only have to report ONE YEAR on the cash flow per share. Please do not report on Nike, as that will be the firm that I post on as an example for what I’m expecting. Again, please do not duplicate firms by including the name of your chosen firm in the title to your post. Also, please respond to questions/comments from your instructor regarding your post.