Beware The Profit Makers – Cash is King!

Johnny HopkinsResearchLeave a Comment

If there’s one thing I’ve learnt about analyzing financial statements over the years, it’s that you must analyse all three financial statements, Balance Sheet, Income Statement and Statement of Cashflows before you consider making an investment.

Here’s a real-life example to show you what I mean.

In 2015 AT&T Inc. (NYSE:T) reported a Net Profit of $13.34 Billion. That’s the good news, but let’s take a look at the company’s Statement of Cashflows.

Here’s the company’s Statement of Cashflows taken directly from the 2015 10K. I’ve changed the format so it’s a little easier to understand:

(All amounts in millions)
Net Income 13,345
Operating Cashflow 35,880
Investing Cashflow -49,144
CF After Investing -13,264
Dividends -10,200
Other Financing -3,818
Total Other -3,818
Debt Capital In/Out
Repayment of long-term debt -10,042
Issuance of long-term debt 33,969
Net change in short-term debt -1
Net Debt 23,926
Equity Capital In/Out
Purchase of Treasury Stock -269
Issuance of Treasury Stock 143
Net Equity Capital -126
Cash Movement -3,482
Bank Account Open 8,603
Back Account Close 5,121

The statement of cashflows shows that operating cashflow minus investing cashflow leaves negative ($13.26 Billion) of cashflow after investing.

With that in mind, the statement then shows that the company paid dividends totaling ($10.2 Billion) and has other financing activities of ($3.8 Billion).

To recap, that means the company had negative cashflow after investing of ($13.26 Billion) plus the dividend payment ($10.2 Billion) plus other financing activities of ($3.8 Billion), that adds up to a total of negative ($27.28 Billion).

What does the company’s statement of cashflows show next?

The statement of cashflows shows purchases and issues of treasury stock for a total of negative ($126 Million).

More importantly, the statement also shows issuance of new debt totaling $23.93 Billion, all of which leaves the company with a negative ($3.48 Billion) in cash movement for the year.

Now consider this. Without taking on the new debt of ($23.93 Billion) the cash movement figure at the end of the year would have been negative ($27.41 Billion).

Compare that number to the company’s reported net profit of positive $13.34 Billion and you’ll see a significant difference.

The point here is that while both the income statement and the statement of cashflows are correct, it would be remiss of you not to check all three statements in your analysis.

Personally, I always start with the statement of cashflows to see whether the company has sufficient operating cashflow to cover all of its investment activities and dividend payments, or whether the company had to source funding externally through the issuance of new shares or additional debt.

In this example above AT&T had insufficient operating cashflow to cover its entire investing activities, moreover the company still paid dividends of $10 Billion and simply took on additional debt of almost $24 Billion to cover the shortfall.

Never forget the old saying, Cash is King!

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