Net Cash Flow (NCF). Types of cash flows

To estimate cash flows, a number of simple ratios are used and specialized complex indicators, which include the following.

1. Momentary and interval multipliers, reflecting the financial results of an enterprise and defined as the ratio of the enterprise’s share price to a number of final performance indicators at a specific point in time or for a period. Momentary indicators include, for example:
- price to gross income ratio;
- price/earnings ratio before taxes;
- price-to-price ratio net profit;
- ratio of price to book value of equity.

As interval multipliers are used, for example:

price-to-revenue ratio;
price-earnings ratio;
price-cash flow ratio;
ratio of price and dividend payments.
2. Profitability indicators, for example:
- return on assets ( ROA - is defined as the ratio of net profit to total assets;
- return on investment ( ROI - calculated as return (the amount of income received, net profit) on invested capital;
- return on equity ( ROE - is calculated as the ratio of net profit to the share capital of the enterprise.
3. The capitalization method exists in two modifications:
- direct capitalization, according to which the value of an enterprise is determined as the ratio of the net annual income that the enterprise receives to the capitalization rate calculated on its own capital;
- mixed investments, when the value of an enterprise is determined as the ratio of the net annual income that the enterprise receives to the total capitalization rate, which is determined by the weighted average value of the cost of equity and debt capital.
4. Valuation models based on profit indicators, including

number using:

indicator of earnings before interest, taxes and depreciation - EBITDA, which allows you to determine the enterprise’s profit from its core activities and compare it with similar indicators of other enterprises;
indicators of operating profit before interest and taxes - EBIT (Earnings before interest and taxes), net operating profit less adjusted taxes - NOPLAT (Net operating profit less adjusted tax) and net operating profit before interest expenses - NOPAT (Net operating profit after tax). The following scheme for calculating indicators is possible:

Revenue - Expenses for ordinary activities = EBIT - Tax(Adjusted income tax) = NOPLAT.

The income tax used in the calculation is called adjusted when there are differences between the financial and tax reporting of the enterprise. The current income tax in the income statement and the amount of income tax calculated for payment to the budget on the tax return, as a rule, have different meanings. Indicators NOPLAT And NOPAT associated with the calculation of economic added value EVA(English - economic value added). If when calculating the value NOPLAT data is taken from tax reporting, then the value of income tax is taken from financial reporting.

For calculation NOPLAT operating profit value is used EBIT from operating activities, adjusted for the amount of taxes that the enterprise would pay if it did not have non-operating income and expenses and borrowed sources of financing. Company McKinsey & Co proposed the following calculation method NOPLAT

EBIT- Income tax from the income statement - Tax shield on interest payments (Interest payments x Tax rate) - Non-operating income tax +

Change in the amount of deferred tax payments = NOPLAT.

Index NOPAT in the case where it is taken as a basis tax reporting, can be calculated using the formula:

NOPAT= EBIT- Tax = EBIT ( 1 - CT),

Where CT- tax rate paid on operating profit EBIT.

5. Cash flow indicator CF (cash flow) determines the financial result of the enterprise and is calculated as the difference between total amount receipts and expenditures of capital. When capital investments exceed the amount of return, the value CF will be negative, in the opposite case - positive. Unlike earnings-based valuation metrics, SE takes into account investment investments immediately - in the year of their implementation, and not in parts - through depreciation, as is customary in accounting when calculating profit. The enterprise value is determined from the expression:

Enterprise value = Present value of cash flows of the forecast period + Present value of cash

extended period flows.

The method is used when there is confidence in the correct determination of the value of discounted cash flows for the years of the forecast and extended periods.

6. Techniques combined into the concept of cost management VBM (value-based management), according to which the target management function is cash flows and enterprise value. At the end of the 20th century. indicators have been developed, e.g. MVA, SVA, CVA, CFROI, EVA, allowing you to calculate cash flows and costs

McKinsey & Co, Copeland, Koller, Murrin. Valuation. 3rd edition, p. 163. Model of economic profit. See http://fmexp.com.ua/ru/models/eva, 2010.

enterprises when used as an information base

financial statements of the enterprise:

using cash flow measures, e.g. FCF (free cash flow) Money), ECF (equity cash flow - cash flows for shareholders). This group of indicators operates in terms of discounted cash flows. In this case, the discount rate is calculated for the indicator ECF by model SARM, and to calculate the indicator FCF often taken equal to the weighted average cost of capital WACC. As a result of calculating the indicator FCF the cash flow available to shareholders and creditors of the company is recorded, and the indicator ECF- cash flow available to shareholders after repayment of debt obligations;
using indicators NPV(English, net present value - net present value) And AGC(English, adjusted present value - adjusted present value). This group of indicators is used, for example, in the case when an enterprise can be presented as a set of parts, each of which can be assessed as an independent investment project. If there are one-time or distributed investments, the enterprise uses the indicator NPV The NPV indicator represents net cash flow, defined as the difference between the inflow and outflow of cash, reduced to the current point in time. It characterizes the amount of cash that an investor can receive after the proceeds recoup investments and payments. The difference in the calculation of the indicator AGC from calculating the indicator NPV consists in using the effect of “tax protection”;
based on combining income and expenses - model EVO (Edwards - Bell - Ohlson valuation model). In this case, the advantages of the cost and income approaches are used. The value of an enterprise is calculated using the current value of its net assets and discounted flow, defined as the deviation of profit from its industry average;
based on the concept of residual income using indicators EUA(English, economic value added - economic value added), MUA(English, market value added - market value added) And SUA(English, cash value added - added value of residual cash flow).

Let's consider individual evaluation indicators.

1. Market value added indicator MVA allows you to evaluate an object based on market capitalization and market value of debt. It shows the discounted value of current and future cash flows. Index MVA is calculated as the difference between the market price of capital and the amount of capital attracted by the enterprise in the form of investments. The higher the value of this indicator, the higher the performance of the enterprise is assessed. The disadvantage of the indicator is that it does not take into account interim returns to shareholders and the opportunity cost of invested capital.
2. Indicator SVA(English - shareholder value added) called an indicator of calculating value based on “shareholder” added value. It is calculated as the difference between the value of share capital before and after the transaction. When calculating this indicator, it is considered that added value for shareholders is created when the return on investment capital ROIC greater than the weighted average cost of capital raised WACC. This will only continue during the period when the enterprise is actively exploiting its competitive advantages. As soon as competition in this area increases, ROIC decreases, the gap between ROIC And WACC will become insignificant and the creation of “shareholder” added value will cease.

There is another definition SVA is the increment between the estimated and book value of share capital. The disadvantage of the method is the difficulty of predicting cash flows. The expression for calculating the cost is:

Enterprise value = Market value of invested capital at the beginning of the period + Amount SVA forecast period +

Market value of assets of non-conducting activities.

3. Total shareholder return indicator TSR(English - total shareholders return) characterizes the overall effect investment income shareholders in the form of dividends, an increase or decrease in the company's cash flows due to an increase or decrease in the stock price for a certain period. It determines the income for the period of ownership of the company's shares and is calculated as the ratio of the difference in the price of the company's shares at the end and beginning of the analyzed period to the share price at the beginning of the period. The disadvantage of this indicator is that it does not allow taking into account the risk associated with investments, which is calculated in relative form and determines the percentage of return on invested capital, and not the return amount itself, etc.
4. The cash flow indicator is determined by the return on invested capital CFROI(English - cash flow return on investment) as the ratio of adjusted cash inflows at current prices to adjusted cash outflows at current prices. The advantage of the indicator is that it is adjusted for inflation, since the calculation is based on indicators expressed in current prices. In the case when the value of the indicator is greater than the value set by investors, the enterprise generates cash flows, and if not, then the value of the enterprise decreases. The disadvantage is that the result obtained is presented as a relative indicator, and not as a sum of costs.
5. Indicator CVA(English - cash value added), otherwise called the LS/Tsang indicator. - residual cash flow), created in accordance with the concept of residual income and is defined as the difference between operating cash flow and the product of the weighted average cost of capital by the adjusted total assets. Unlike the indicator CFROI, this indicator takes into account the value WACC and the adjustments are similar to those made to calculate the indicator EVA.
6. Balanced Scorecard BSC(English - balanced

scorecard) was developed by D. Norton and R. Kaplan. The purpose of the system BSC is to achieve the goals set by the enterprise and take into account financial and non-financial factors for this. The system is based on the desire to take into account the interests of shareholders, buyers, creditors and other business partners.

System BSC arose as a result of the need to take into account non-financial indicators in business assessment and the desire to take into account indicators not included in the financial statements. The purpose of its application is to obtain answers to a number of questions, including: how do clients, partners and authorities evaluate the enterprise? government controlled, what are its competitive advantages, what is the volume and efficiency innovation activity, what is the impact of staff training and the implementation of corporate policy in the social life of the team?

For effective management business in this case needs to determine the values, objectives and strategy acceptable to shareholders, debtors and creditors, and develop methods for quantifying these interests. As these issues are resolved, the system BSC will become important tool cash flow management.

7. Economic value added indicator EVA(English - economic value added) used when it is difficult to determine the company's cash flows for the future. Based on

residual income method developed by A. Marshall. Enterprise value based on indicator EVA in general can be calculated using the formula:

Enterprise value = Invested capital +

Present value EVA forecast period +

Present value EVA extended period.

Economic profit indicator EVA calculated using information about investment projects and financial reporting data as the difference between profit after tax, but before interest on borrowed funds and the costs (cost) of raising capital. Index EVA developed in the USA in the 1990s by the company Stern Stewart& Co, it allows you to compare how much a given enterprise earns in comparison with alternative projects. The enterprise value is equal to the sum of invested capital, as well as discounted values of the indicator EVA current and future investments and is calculated using the formula:

EVA = NOPAT-SHSS x/C,

Where tss- weighted average cost of capital; 1C- valuation of capital (the amount of invested or attracted capital).

Application of the indicator EVA provides for a number of adjustments to the values of financial reporting items for the calculation NOPAT and /C described Stewart G. Bennett .

Positive value EVA As a rule, it indicates an increase in the value of the enterprise, and a negative one indicates its decrease. Management system developed based on the indicator EVA, called EVA-based management and determines the need:

quantitative measurement of the performance of employees and managers with subsequent transition to assessment using aggregate indicators;
development of generalized criteria for the effective placement and management of enterprise capital;
creating incentives and motivation for work, bonus and remuneration systems and their mathematical description;
development of assessment indicators corporate culture and etc.

Index EVA can be used to evaluate the enterprise as a whole and to evaluate its individual objects.

Lednev E.E. BSC and EVA® - competitors or allies? - http://www.cfm. ru/management/controlling/bsc-eva. shtml 04/16/2002
Bennett G. Stewart. The Quest for Value. New York: Harper Business School Press, 1991; Copeland T., Koller T., Murrin J. The value of companies: valuation and management. Per. from English M.: ZAO "Olymp-Business", 2005.

The purpose of the article is to develop a methodology for calculating cash flows in the forecast and extended periods and the value of the company, as well as determining their changes under the influence of main factors.

Alexander Samylin
Valuation of company cash flows
"Economic Strategies", No. 08-2008, pp. 120-125

Introduction

From the beginning of the transition to market economy The company's financial management has undergone changes. At the first stage, the main goal of management was to maximize profits, and at the second - to expand and conquer new markets. As competition grew and unoccupied business niches disappeared, the emphasis in financial management began to shift to increasing the profitability of activities. Currently, the target function of management is increasingly becoming the growth of the company's economic profit, increasing the value of the business and cash flows directed to shareholders and investors.

Competitors, buyers, suppliers and investors when selling a company, in case of raising financing and in the process of business planning financially economic activity The question is increasingly being asked: how much is your business and your company worth? This question is not idle, and the answer to it determines the level of risk for counterparties when establishing cooperation with a given company and when making management decisions. A company whose value is higher and which generates large cash flows, other things being equal, is characterized by lower risks in terms of investment and return on invested capital.

An assessment of the value of a company is necessary during the purchase and sale, during the reorganization of the company, in accordance with Article 57 of the Civil Code of the Russian Federation, during insurance, for registration of collateral when obtaining a loan, in the process of preparing a prospectus for the issue of securities and organizing the circulation of securities on the stock exchange, when searching for an investor and in others cases. All this determines the relevance of the problem of assessing the value of a company and the cash flows it generates.

The value of a company should be understood primarily as a complex indicator in monetary terms that determines the state of all areas of activity, including ordinary activities, financial and investment activities minus liabilities. To the mentioned areas of activity characterized by financial indicators, one should also add activities aimed at increasing the level of professionalism of employees, maintaining and improving the company’s image. Such activities are characterized by non-financial indicators, which for the most part are not yet formalized mathematically, but also contribute to increasing the value of the company. Therefore, the value of a company can be defined as the totality of its assets, invested capital, its return in the forecast and extended periods, minus liabilities.

When calculating the value of a company, they use financial statements, which reflect information about assets and liabilities.

At the same time, the cash flows generated by the company resulting from the increase working capital And capital investments, for example, fixed assets and intangible assets, are not reflected in the financial statements. Therefore, it is necessary to develop a methodology for calculating cash flows in the forecast and extended periods and the value of the company, and determine their changes under the influence of main factors. Solving these problems was the purpose of the article.

Types and methods of assessing the value of a company

According to the Decree of the Government of the Russian Federation No. 519 of 07/06/2001 “On approval of valuation standards”, a distinction is made between: the market value of the valuation object and the types of value of the object that are used in specific economic situations, for example: the value of the valuation object with a limited market, the cost of replacement and reproduction , disposal and liquidation value, investment value and value for tax purposes.

Calculation of the company's value is carried out on the basis of one of three approaches: cost, comparative or income. The cost approach is based on determining value by establishing the costs that are necessary to restore or replace the valued object, taking into account its wear and tear. This approach is used to value newly created companies and is based on the net asset method and the liquidation value method. With the comparative approach, the value of an object is determined based on a comparison of the value of objects that have similar and homogeneous evaluation and comparison criteria. The comparative approach uses three valuation methods: the capital market method, the industry ratio method and the transaction method. In the first two cases, the value of the operating company is assessed, and in the last - the value of the company that changes its type of activity. The income approach is based on determining the cash flows generated by the company and calculating net cash flow as the difference between discounted cash inflows and outflows. This approach is used in the case of implementation of investment projects and investments in intellectual property. The period of time during which it is planned to receive income is divided into two periods: forecast, characterizing cash flows during the implementation of the project, and extended - upon completion of the project. In the first step, future cash flows are forecast, in the second step, future cash flows are converted to present value, and in the third step, they are reflected in the forecast cash flow statement. In an unstable economy, forecasting cash flows is difficult, which narrows the scope of application of this approach. The income approach uses two methods: the profit capitalization method and the discounted cash flow method. The capitalization method is used for companies that have established cash flows - both their receipts from investors and shareholders, and the return on invested capital. The discounted cash flow method is used for companies that make profits through competitive advantages.

Methods for estimating a company's value and the cash flows generated have changed over time. Initially, calculations were carried out using moment and interval multipliers, profitability and profit indicators. Currently, a number of specialized complex indicators are used.
The following methods of valuation are distinguished:

using discounted cash flow indicators, for example FCF (Free Cash Flow), ECF (Equity Cash Flow). The CCF indicator is used when the amount of cash allocated to shareholders and investors is established, and the ECF indicator is used when the amount of cash flows to shareholders after the repayment of debt obligations is established;
using indicators, for example NPV (Net Present Value), APV (Adjusted Present Value), when the company can be presented as a set of parts, each of which can be assessed as an investment project. If there are one-time or distributed investments, the NPV indicator is used. Its difference from the APV indicator is the use of “tax protection” in the case of the APV indicator;
based on the principle of residual income using indicators, for example EVA (Economic Value Added), MVA (Market Value Added). The use of the EVA indicator makes it possible to determine whether shareholders receive the same return on invested share capital as in the case of its investment in alternative projects. MVA measures the value of an enterprise based on market capitalization and the market value of debt, but does not take into account intermediate shareholder returns and the opportunity cost of invested capital;
based on combining income and expenses - EBO (Edwards-Bell-Ohlson valuation model), when cost and income approaches are combined taking into account the value of net assets.

The value of a company is determined as the sum of the cost of share capital and excess profits, calculated as discounted cash flow.

Calculation and change in the value of a company under the influence of main factors

A methodology has been developed for calculating cash flows when a number of key factors change. In table 1 shows an example of calculating cash flows with the following values of factors in the forecast period: revenue growth rate - 25%, cost growth rate - 15%, growth rate of commercial and administrative expenses - 7%, weighted average cost of capital - 20%, growth rate of invested capital - 8%, the growth rate of depreciation charges is 6%. The growth rate of these factors in the extended period is 5%.
Based on the proposed methodology, changes in the value of the company's cash flows under the influence of main factors were analyzed. The range of factor values is established based on the business conditions of companies engaged in different types of activities.

The change in cash flows and company value when the profit growth rate changes is shown in Fig. 1. The calculation was carried out under the condition that the values of the factors remain unchanged: the growth rate of revenue for the extended period qn is equal to 5%, the value of the investment rate NI in the forecast and extended period is equal to 14.4%, the amount of capital invested at the beginning of the forecast period IC = 53.2 thousand rubles ., the amount of depreciation charges of the joint-stock company attributable to fixed production assets is 15 thousand rubles.

The values of the weighted average cost of capital WACC and the return on invested capital ROIC varied.

The presented graph shows that the amount of cash flows due to the increase in working capital and investment investments differs by year of the forecast and extended periods and decreases as the WACC value increases from 6 to 30%. This is due to an increase in the cost of attracted capital, as a result of which the company has less available funds at its disposal and cash flows decrease. A noticeable difference in cash flows begins at WACC = 10%. With an increase in the growth rate of profit NOPLAT q from 5 to 35%, which is determined by the multidirectional influence of such factors as sales proceeds, cost of sales, commercial and administrative expenses, the amount of cash flows increases. With an increase in the WACC value by 6 times, cash flows increase relatively slightly, namely from 911 thousand to 1567 thousand rubles, or 1.7 times with WACC = 30%. A significant change in cash flow occurs at a value of WACC = 6%, when this value changes from 22,780 thousand to 47,896 thousand rubles, or 2.1 times. With an expected annual growth rate in the range of 15-20% and the price of attracted capital in the range of 15-20%, the company can, when planning financially, focus on cash flows in the range from 2000 to 3500 thousand rubles.

The dependence of changes in the value of cash flows on changes in the investment rate NI is presented in Fig. 2. The calculation was performed at a constant profit growth rate in the forecast and extended periods. Accordingly, q = 15%, qn = 5%, JSC amount = 15 thousand rubles. The amount of cash flows decreases as the fee for borrowed capital increases. With an increase in the value of NI, the amount of cash flow decreases from 33,033 thousand to 22,624 thousand rubles. with WACC = 6% and from 1218 thousand to 834 thousand rubles. with WACC = 30%. There is a decrease in cash flow by 31.5%.

The growth of NI is determined by the increase in working capital and capital investments. As a result, free cash flow decreases, which determines the decrease in final cash flow. This is accompanied by a drop in ROIC by 3.5 times: from 1.51 to 0.43. A significant change in cash flows is observed in the WACC range from 6 to 15%. The conditions under which farming is possible is the NI range from 30 to 35%.

In this case, when doing financial planning, the company can use cash flows in the calculations in the amount of 2,000 thousand to 3,000 thousand rubles. in the selected WACC range from 15 to 20%.

In Fig. Figure 3 shows the dependence of changes in cash flows on the amount of depreciation charges. The calculation was made based on the assumption that the rate of profit growth in the forecast and extended periods is the same and amounts to 15%: q = qn = 15%, the amount of invested capital is equal to 53.2 thousand rubles. The graph shows that with a change in the weighted average cost of capital from 6% to 30%, or 5 times, cash flow decreases by 27.1 times, which is explained by the diversion of significant funds to pay for the capital attracted by the company. With an increase in the amount of depreciation charges from 10 thousand to 50 thousand rubles. cash flow increases: with WACC = 6% - from 29,136 thousand to 34,367 thousand rubles, and with WACC = 30% - from 1074 thousand to 1267 thousand rubles. When the amount of joint stock company increases by 5 times, the cash flow increases by 1.18 times. The increase in cash flow is determined by the growth of gross cash flow and free cash flow with a decrease in the investment rate from 16.2 to 12.5%. In accordance with the IFRS IAS 16 “Fixed Assets” standard, the method of calculating depreciation can change during the life of the asset, which means that it is possible to regulate cash flows using the AO factor.

In Fig. Figure 4 shows the dependence of changes in cash flows on the value of return on invested capital ROIC. Calculations were carried out on the basis of the assumption of a constant value of AO = 15 thousand rubles. and investment rates NI = 14.4% in the forecast and extended periods. The amount of cash flow falls with an increase in the WACC value from 6 to 30%, which is due to an increase in the diversion of funds to pay for attracted capital. As ROIC increases, cash flow increases, which is due to an increase in the capital attracted by the company. With WACC = 6%, the amount of cash flow increases from 20,156 thousand to 22,806 thousand rubles, and with WACC = 15% - from 2054 thousand to 2280 thousand rubles. With WACC values from 20 to 30%, cash flow changes slightly and is in the range from 840 thousand to 1520 thousand rubles. For the company, it is preferable to increase the ROIC value. If the ROIC value is > 30%, in the financial planning process you can take into account cash flows in the range from 2000 thousand to 3000 thousand rubles.
The dependence of the change in cash flow on the value of IC is shown in Fig. 5. Calculations were made on the basis of the assumption that the profit growth rate in the forecast period is 15%, and in the extended period – 5%, the amount of JSC = 15 thousand rubles, at the beginning of the analyzed period the amount of invested capital IC = 50 thousand rubles. The decrease in cash flow with an increase in the WACC value from 6 to 30% is explained by the same reasons as in the other graphs above. It is most noticeable at WACCs of 6 to 15% and is virtually constant at WACCs of 15 to 30%. Decrease in cash flow when the IC value changes from 50 thousand to 250 thousand rubles. explained by a decrease in free cash flow with an increase in the investment rate from 13.2 to 88.3%. The results obtained indicate that the greatest influence on changes in the value of the company is exerted by the q factor with a rate of change of about 110% and the IC factor with a rate of change of about 86%.

Conclusion

You can increase the value of your company in the following ways:

due to the structural restructuring of the company, when the main attention is paid, for example, to changing the management structure, to the formation of financial responsibility centers in the company, expanding their rights and increasing responsibility, to developing a system of labor motivation and employee interest in the final result. The costs of this method are significantly lower than when using other methods. The main problem is to explain to employees the need for changes and teach them new ways of working;
by increasing the transparency and openness of the company for investors, suppliers, buyers and other interested users. This can be achieved, for example, by switching to International Financial Reporting Standards, disseminating information about the state of affairs and development prospects of the company through rating agencies.The disadvantages of this method are longer implementation times and higher costs than when using the first method, since the main emphasis is on attracting foreign capital, and therefore on creating an attractive image of the company abroad;
through the development of industrial potential through, for example, the expansion of production, the introduction of new and reconstruction of existing facilities. A company that has invested in an investment project will reduce its profitability and profitability indicators in the current period, but with the receipt of cash flows at the beginning of the return from the investment project (in the forecast period) and after its completion (in the extended period), having increased potential, it will significantly increase its attractiveness and value. This is the most promising method and the most expensive, since it is associated with increased risks;
due to the selection of optimal values of influencing factors based on the conducted research. Their results can be used in drawing up a cash flow statement using the budgeting method and forecast financial reporting.

PES 8278/09.11.2008

Literature:
1. Gryaznova A.G., Fedotov M.A., Eskindarov M.A., Tazikhina T.V., Ivanov E.N., Shcherbakova O.N. Estimation of the value of an enterprise (business). M.: INTERREKLAMA, 2003, p. 544.
2. Copeland T., Koller T., Murrin J. Cost of companies: assessment and management / Transl. from English M.: ZAO "Olympus Business", 1999, p. 576.
3. Popov D. Evolution of indicators of the enterprise development strategy // Company Management. 2003. No. 1, p. 69-75.
4. Atkinson A., Epstein M. Measure for measure: Realizing the power of the balanced scorecard // CMA Management. September 2000, p. 22-28.
5. Kaplan R.S., Norton D.P. Linking the balanced scorecard to strategy // California Management Review. 1996. Vol. 4, Fall, p. 53-79.

Financial analysts and economists are increasingly being let down. Practice shows that companies try to embellish existing indicators, easily maneuvering numbers and financial reporting indicators. Another thing - cash flows: they are more difficult to distort, they are real, based on existing and confirmed facts of cash flow.

Money odds characterize the company’s ability to finance operating activities, attract new investments, help with financial modeling of the company’s behavior in future periods (especially its ability to repay received loans) and in planning repayment schedules to avoid cash gaps.

In 1993, D. Giacomino and D. Mielke proposed using cash ratios to assess the adequacy of cash flows to finance the needs of the organization and assess the efficiency of generating cash flows by the company (Giacomino D.E., and Mielke D.E. 1993. Cash flows: Another approach to ratio analysis. Journal of Accountancy (March)).

Let's consider the main monetary ratios that characterize the company's ability to finance its operating activities.

Cash content of sales

To determine the ratio, it is necessary to take into account that gross current cash receipts (Cash Receipts) may be credited to past credit sales. The Gross Cash Flow from Operations to Sales ratio is calculated using the formula:

Dsp = (Dpp + Z) / V
Where, DSP is the cash content of sales; DPP - cash receipts from sales; Z - payments for work performed; B - revenue.

Note that revenue includes not only current sales, but also interim payments as work is completed under contracts (percentage of completion method), that is, this is similar to a return to the cash method of accounting.

Cash return on sales

The Cash Return on Sales ratio shows the net operating cash inflow per unit of sales (after taking into account all cash outflows associated with sales in the current period) and is defined as:

Drp = DPo / V
Where, OPO is operating cash flow.

It is useful to compare this metric to the traditional accounting operating margin.

Cash content of operating margin

The indicator is calculated as the ratio of cash return on sales to operating margin in percentage terms, or as the ratio of net operating cash flow to operating profit multiplied by 100%. The calculation formula looks like:

House = (DPo / Po) x 100%
Where, House is the cash content of the operating margin; Po - operating profit.

This ratio can be higher than 100%, since profit includes non-cash expenses, primarily depreciation.

Cash content of net profit

The developers of US GAAP and IFRS-IAS standards recommend comparing cash flow from operating activities with net profit. The net profit cash ratio shows to what extent net profit is in the form of real money, and to what extent in the form of paper records:

Dchp = Dpch / ChP
Where, DPP is the cash content of net profit; DPc - net cash flow from operating activities; PE - Net profit.

An alternative to assessing earnings quality is the adjusted net income content ratio, which compares operating cash flow after depreciation and amortization to net income. This makes it possible to better assess what percentage of profit consists of cash receipts:

Dchp = (Dpch - A) / ChP
Where, A is the depreciation of tangible and intangible assets.

A similar procedure can be done with the operating margin cash ratio.

Operating cash flow to EBITDA

Shows the real cash content of operating profit before interest and depreciation, the coefficient is calculated using the formula:

Dod = DPh / EBITDA
Where, Dod is operating cash flow.

CFO to EBITDA is a rarely used ratio, but it can help assess the quality of earnings with depreciation and amortization recovered.

Cash to revenue

The Cash to Sales Ratio characterizes the sufficiency or excess of the company’s cash resources:

Ds/v = (M + CB) / V
Where, Дс/в - ratio of cash to revenue; M - money and cash equivalents; Central Banks are easily marketable securities.

As a rule, this ratio is compared with the industry average or with the practice of the best companies.

It should be noted that a simple comparison of the ratio of a company's cash to revenue is quite arbitrary. Since the need for cash depends not only on the size of the company’s revenue, but also on the amount financial leverage, investment plans of the company and many other parameters. A company can deliberately create stabilization funds, debt repayment funds, insurance and liquidity reserves for a rainy day. In this case, it is more appropriate to adjust the formula:

Ds/v = (M + CB) / (Np + Kz)
Where, Нп - urgent payments; Kz - planned capital expenditures.

If the ratio is greater than 1, then the company has excess cash.

Cash flow to total debt

The Cash Flow from Operations to Total Debt Ratio indicator most fully predicts the financial insolvency of companies, according to William Beaver. The formula for calculating the indicator is:

Dp/d = DPod / R
Where, Dp/d - cash flow to total debt; Cash flow from operating activities; P - total debt.

The inverse of this coefficient can be called: total debt to annual cash flow:

The ratio is used to assess a company's credit position and shows the length of time it would take to pay off debt if all operating cash flow (which was often considered comparable to EBITDA) was used to pay off debt. The lower the value of this coefficient, the better.

Cash coverage ratio

The ratio shows the company's ability to pay off debts while complying with the stated parameters of the dividend policy. The coefficient is calculated using the formula:

Ds/d = (DPod - Dv) / R
Where, Ds/d is the cash debt coverage ratio; Dv - dividends.

Cash / Debt Coverage ratio is similar to the above cash flow to total debt ratio. The difference is that the numerator subtracts dividends (which are often mandatory payments) from operating cash flow.

Debt repayment period(Years Debt) is the inverse of the cash debt coverage ratio:

It informs about the number of years during which the company will be able to pay off its debt, without forgetting to pay dividends to shareholders. This is a simpler way of expressing the information provided by the cash coverage ratio.

Cash coverage ratio for the current portion of long-term debt(Cash Maturity Coverage Ratio) - the ratio of cash flow from operating activities minus dividends to the current portion of long-term debt:

Dcm = (DP - Dv) / RT
Where, DSM is the cash coverage ratio of the current portion of long-term debt; RT is the current portion of long-term debt.

The indicator reflects the ability to pay long-term debts as they fall due. When attracting long-term borrowed funds, it is a good idea to check the ability to repay them through operating activities. So this ratio can be used even at the stage of planning and developing financial policy and largely shows the debt burden on operating cash flow.

Dividends are deductible because the company must retain equity capital and satisfy at least the minimum requirements of shareholders.

Total free cash flow ratio

The Total Free Cash Ratio shows the company's ability to repay current debt obligations without harming operating activities and shareholders and is calculated using the formula:

Dsds = (Pr + Pr + A + Ar - Two - KZ) / (Pr + Ar + RT + From)
Where, Dsds is the coefficient of total free cash flows; Pr - accrued and capitalized interest expenses; Ar - rental and operating leasing expenses; Two - declared dividends; KZ - capital costs; From - the current part of capital leasing obligations.

The estimated amount required to maintain the current level of operating activity (maintenance CAPEX) can be used as capital investment. It is often determined as a percentage of total assets or the value of fixed assets.

Debt service coverage ratio

The classic Debt Service Coverage Ratio is calculated as the ratio of earnings before interest, taxes, and depreciation to the annual interest and principal payments.

DSCR = EBITDA / Annual interest and principal payments

The debt service coverage ratio is a leading indicator. The cash flow statement version of this ratio is to include operating cash flow in the numerator.

Cash Interest Coverage Ratio

IN good years The company has the ability to refinance its long-term debt, so it can survive even with a poor cash coverage ratio for the current portion of its long-term debt. However, the company is not able to refuse to pay interest payments. Cash Interest Coverage Ratio shows a company's ability to pay interest.

CICR = (DC + Pu + N) / Pu
Where, Pu - interest paid; N - taxes paid.

This ratio is more accurate than the Earning Interest Coverage Ratio because a low Earnings Interest Coverage Ratio does not mean that the company does not have money to pay interest, just as a high value does not mean that the company has money to pay interest.

Cash flow adequacy ratio

The Cash Flow Adequacy Ratio is the ratio of annual net free cash flow to the average annual debt payments for the next 5 years (however, it is more applicable in stable conditions). The denominator helps smooth out unevenness in principal payments. The numerator also takes into account cyclical changes in capital financing.

CFAR = NFCF / DVsr
Where, NFCF is annual net free cash flow; DVSR - average annual debt payments over the next 5 years

The client’s cash flow indicators are less susceptible to distortion compared to the balance indicators of the financial statements, since they directly correspond with the cash flow of his counterparties.

Money odds are based on the fact of the presence or absence of funds from the enterprise. Cash flows are ideal for assessing solvency. If a company does not have enough cash, it is unable to finance its ongoing operations, pay off debts, pay salaries and taxes. The emptiness in a corporate wallet can be noticed long before the onset of official insolvency. The application of some of these ratios in banking practice is already a fait accompli. Cash flows make it possible to establish the quality (cash content) of the company's paper revenue and profits, which are assessed primarily when issuing loans.

The main goal of any enterprise is to make a profit. Subsequently, the profit indicator is reflected in a special tax report on financial results - it is this indicator that indicates how efficient the operation of the enterprise is. However, in reality, profit only partially reflects a company's performance and may not provide any insight into how much money the business actually makes. Complete information on this issue can only be obtained from the cash flow statement.

Net profit cannot reflect the funds received in real terms - the amounts on paper and the company's bank account are different things. For the most part, the data in the report is not always factual and is often purely nominal. For example, revaluation of exchange rate differences or depreciation charges do not bring in real cash, and funds for goods sold appear as profit, even if the money has not yet actually been received from the buyer of the goods.

It is also important that the company spends part of its profits to finance current activities, namely the construction of new factory buildings, workshops, retail outlets— in some cases, such expenses significantly exceed the company’s net profit. As a result of all this big picture may be quite favorable and in terms of net profit the enterprise may be quite successful - but in reality the company will suffer serious losses and not receive the profit indicated on paper.

Free cash flow helps to make a correct assessment of a company's profitability and assess the real level of earnings (as well as better assess the capabilities of a future investor). Cash flow can be defined as the funds available to a company after all due expenses have been paid, or as the funds that can be withdrawn from the business without harming the business. You can obtain data for calculating cash flows from the company’s report under RAS or IFRS.

Types of Cash Flows

There are three types of cash flows, and each option has its own characteristics and calculation procedure. Free cash flow is:

from operating activities - shows the amount of cash that the company receives from its main activity. This indicator includes: depreciation (with a minus sign, although no funds are actually spent), changes in accounts receivable and credit, as well as inventory - and in addition other liabilities and assets, if present. The result is usually shown in the column “Net cash from core/operating activities.” Symbols: Cash Flow from operating activities, CFO or Operating Cash Flow, OCF. In addition, the same value is simply referred to as cash flow Cash Flow;

from investment activities - illustrates the cash flow aimed at developing and maintaining current activities. For example, this includes the modernization / purchase of equipment, workshops or buildings - therefore, for example, banks usually do not have this item. In English, this column is usually called Capital Expenditures (capital expenses, CAPEX), and investments can include not only investments “in oneself”, but also be aimed at purchasing assets of other companies, such as shares or bonds. Denoted as Cash Flows from investing activities, CFI;

from financial activities— allows you to analyze the turnover of financial receipts for all operations, such as receipt or repayment of debt, payment of dividends, issue or repurchase of shares. Those. This column reflects the company's business conduct. A negative value for debts (Net Borrowings) means their repayment by the company, negative meaning for shares (Sale/Purchase of Stock) means purchasing them. Both of these characterize the company from the good side. In foreign reporting: Cash Flows from financing activities, CFF

Separately, you can dwell on promotions. How is their value determined? Through three components: depending on their number, the company’s real profit and market sentiment towards it. An additional issue of shares leads to a fall in the price of each of them, since there are more shares, and the company's results most likely did not change or changed slightly during the issue. And vice versa - if a company buys back its shares, then their value will be distributed among a new (fewer) number of securities and the price of each of them will rise. Conventionally, if there were 100,000 shares at a price of $50 per share and the company bought back 10,000, then the remaining 90,000 shares should cost approximately $55.5. But the market is the market - revaluation may not occur immediately or by other amounts (for example, an article in a major publication about a company’s similar policy can cause its shares to rise by tens of percent).

The situation with debts is ambiguous. On the one hand, it’s good when a company reduces its debt. On the other hand, wisely spent credit funds can take the company to a new level - the main thing is that there is not too much debt. For example, at famous company Magnit, which has been growing actively for several years in a row, free cash flow became positive only in 2014. The reason is development through loans. Perhaps, during your research, it is worth choosing for yourself some limit of maximum debt, when the risks of bankruptcy begin to outweigh the risk of successful development.

When summing up all three indicators, it is formed net cash flow - Net Cash Flow . Those. this is the difference between the inflow (receipt) of money into the company and its outflow (expense) in a certain period. If we are talking about negative free cash flow, then it is indicated in brackets and indicates that the company is losing money, not earning it. At the same time, to clarify the dynamics, it is better to compare the company’s annual rather than quarterly performance in order to avoid the seasonal factor.

How are cash flows used to value companies?

You don't need to consider Net Cash Flow to get an impression of a company. The amount of free cash flow also allows you to evaluate a business using two approaches:

based on the value of the company, taking into account equity and borrowed (loan) capital;

taking into account only equity capital.

In the first case, all cash flows reproduced by existing sources of borrowed or equity funds are discounted. In this case, the discount rate is taken as the cost of capital attracted (WACC).

The second option involves calculating the value not of the entire company, but only of its small part - equity capital. For this purpose, discounting of FCFE's equity is carried out after all the company's debts have been paid. Let's look at these approaches in more detail.

Free Cash Flow to Equity - FCFE

FCFE (free cash flow to equity) is a designation of the amount of money remaining from the profit received after paying taxes, all debts and expenses for the operating activities of the enterprise. The calculation of the indicator is carried out taking into account the net profit of the enterprise (Net Income), depreciation is added to this figure. Capital costs (arising from upgrades and/or purchase of new equipment) are then deducted. The final formula for calculating the indicator, determined after paying off loans and processing loans, is as follows:

FCFE = Net cash flow from operating activities – Capital expenditures – Loan repayments + New loan originations

The firm's free cash flow is FCFF.

FCFF (free cash flow to firm) refers to the funds that remain after paying taxes and deducting capital expenses, but before making payments on interest and total debt. To calculate the indicator, you must use the formula:

FCFF = Net Cash Flow from Operating Activities – Capital Expenditures

Therefore, FCFF, unlike FCFE, is calculated without taking into account all loans and advances issued. This is what is usually meant by free cash flow (FCF). As we have already noted, cash flows may well be negative.

Example of cash flow calculation

In order to independently calculate cash flows for a company, you need to use its financial statements. For example, the Gazprom company has it here: http://www.gazprom.ru/investors. Follow the link and select the “all reporting” sub-item at the bottom of the page, where you can see reports since 1998. We find the desired year (let it be 2016) and go to the “Consolidated financial statements IFRS". Below is an excerpt from the report:

1. Let's calculate free cash flow to capital.

FCFE = 1,571,323 - 1,369,052 - 653,092 - 110,291 + 548,623 + 124,783 = 112,294 million rubles remained at the company's disposal after paying taxes, all debts and capital expenses (costs).

2. Let's determine the free cash flow of the company.

FCFF = 1,571,323 - 1,369,052 = 202,271 million rubles - this indicator shows the amount minus taxes and capital expenses, but before payments on interest and total debt.

P.S. When American companies All data can usually be found on the website https://finance.yahoo.com. For example, here is the data from Yahoo itself in the “Financials” tab:

Conclusion

In general, cash flow can be understood as the company’s free funds and can be calculated both with and without debt capital. A company's positive cash flow indicates profitable business, especially if it grows from year to year. However, any growth cannot be endless and is subject to natural limitations. In turn, even stable companies (Lenta, Magnit) can have negative cash flow - it is usually based on large loans and capital costs, which, if used correctly, can, however, provide significant future profits.

Dividing the company's market capitalization by the company's free cash flow, we get P/FCF ratio . Market Cap is easy to find on Yahoo or Morningstar. A reading of less than 20 usually indicates a good business, although any figure should be compared to competitors and, if possible, to the industry as a whole.

You can analyze the potential effectiveness of investment projects and the financial and economic activities of a company or enterprise by studying information about the movement of money in them. It is important to understand the structure of cash flows, their magnitude and direction, and distribution over time. In order to conduct such an analysis, you need to know how to calculate cash flow.

Before risking his money and deciding to invest in any venture that involves making a profit, a businessman must know what kind of cash flows it is capable of generating. The business plan must contain information about expected costs and revenues.

The analysis usually consists of two stages:

calculating the capital investments required to implement the initiative and forecasting the cash flows (cash flow) that the project will generate;
determination of net present value, which is the difference between cash inflows and outflows.

Most often, investment (outflow) occurs at the initial stage of the project and during a short initial period, after which the influx of funds begins. To organize a clearly managed structure, cash flow is calculated as follows:

in the first year of implementation - monthly;
in the second year - quarterly;
in the third and subsequent years - based on the results of the year.

Experts often consider cash flow as standard and non-standard:

In the standard one, all costs are incurred first, after which revenues from the enterprise’s activities begin;
In non-standard, negative and positive indicators can alternate. As an example, we can take an enterprise, after the end of its life cycle, according to legal norms, it is necessary to carry out a number of environmental measures (reclamation of land after the completion of mining from a quarry, etc.).

Depending on the type of business activity of a company, there are three main types of cash flow:

Operating(basic). It is directly related to the operation of the enterprise. In it, the main activity of the company (sales of services and goods) acts as an influx of funds, while the outflow occurs mainly to suppliers of raw materials, equipment, components, energy, semi-finished products, that is, everything without which the activity of the enterprise is impossible.
Investment. It is based on transactions with long-term assets and profit from previous investments. The inflow here is the receipt of interest or dividends, and the outflow is the purchase of shares and bonds with the prospect of receiving a profit later, the acquisition of intangible assets (copyrights, licenses, rights to use land resources).
Financial. Characterizes the activities of owners and management to increase the capital of the company to solve the problems of its development. Inflow - funds from the sale of securities and obtaining long-term or short-term loans, outflow - money to repay loans taken, payment of dividends due to shareholders.

In order to correctly calculate a company’s cash flow, it is necessary to take into account all possible factors influencing it, in particular, do not forget about the dynamics of changes in the value of money over time, i.e. discount. Moreover, if the project is short-term (several weeks or months), then bringing future income to the current moment can be neglected. When it comes to starting with life cycle more than a year, then discounting is the main condition of the analysis.

Determining the amount of cash flow

The key indicator by which the prospects of the initiative proposed for consideration are calculated is current value, or (eng. Net Cash Flow, NCF). This is the difference between positive and negative flows over a certain period of time. The calculation formula looks like this:

CI – incoming flow with a positive sign (Cash Inflow);
CO – outgoing flow with a negative sign (Cash Outflow);
n – number of inflows and outflows.

If we are talking about the total indicator of a company, then it is necessary to consider its cash flow as the sum of three main types of cash receipts: main, financial and investment. In this case, the formula can be depicted as follows:

it shows the financial flows:

CFO – operational;
CFF – financial;
CFI – investment.

The current value can be calculated using two methods: direct and indirect:

The direct method is adopted for intra-company budget planning. It is based on revenue from sales of goods. Its formula also takes into account other income and expenses for operating activities, taxes, etc. The disadvantage of the method is that it cannot be used to see the relationship between changes in the volume of funds with the profit received.
The indirect method is preferable because it allows you to analyze the situation more deeply. It makes it possible to adjust the indicator taking into account transactions that are not of a monetary nature. Moreover, it may indicate that the current value of a successful enterprise may be either more or less than the profit for a certain period. For example, purchasing additional equipment reduces the cash flow relative to the profit margin, while obtaining a loan, on the contrary, increases it.

The difference between profit and cash flow consists of the following nuances:

profit shows the amount of net income for a quarter, year or month, this indicator is not always similar to Cash Flow;
when calculating profits, some operations taken into account when calculating cash movements (repayment of loans, receipt of grants, investments or loans) are not taken into account;
individual costs are accrued and affect profit, but do not cause actual cash expenses (expected expenses, depreciation).

The cash flow indicator is used by business representatives to assess the effectiveness of an undertaking. If the NCF is above zero, then it will be accepted by investors as profitable; if it is equal to zero or below it, it will be rejected as one that cannot increase value. If you need to make a choice from two similar projects, preference is given to the one with more NFC.

Examples of cash flow calculations

Let's consider an example of calculating the cash flow of an enterprise for one calendar month. The initial data is distributed by type of activity.

Main:

proceeds from product sales – 450 thousand rubles;
expenses for materials and raw materials – (-) 120 thousand;
employee salaries – (-) 45 thousand;
total expenses – (-) 7 thousand;
taxes and fees – (-) 36 thousand;
loan payments (interest) – (-) 9 thousand;
increase in working capital – (-) 5 thousand.

Total for core activities – 228 thousand rubles.

Investment:

investments in land – (-) 160 thousand;
investments in assets (purchase of equipment) – (-) 50 thousand;
investments in intangible assets (license) – (-) 12 thousand.

Total for investment activities – (-) 222 thousand rubles.

Financial:

obtaining a short-term bank loan – 100 thousand;
repayment of a previously taken loan – (-) 50 thousand;
payments for leasing equipment – (-) 15 thousand;
dividend payments – (-) 20 thousand.

Total for financial activities – 15 thousand rubles.

Therefore, using the formula we obtain the required result:

NCF = 228 – 222 + 15 = 21 thousand rubles.

Our example shows that the monthly cash flow has positive value This means that the project has a certain positive effect, although not a very large one. In this case, you need to pay attention to the fact that in this month the loan was repaid, payment for the land plot was made, equipment was purchased, and dividends were paid to shareholders. In order to avoid problems with paying bills and gain profit, I had to take out a short-term loan from the bank.

Let's look at another example of calculating Net Cash Flow. Here, all the company’s flows are taken into account as inflows and outflows of money without breaking down into types of activities.

Receipts (in thousand rubles):

from the sale of goods – 300;
interest on previously made investments – 25;
other income – 8;
from the sale of property – 14;
bank loan – 200.

Total receipts – 547 thousand rubles.

Costs (in thousand rubles):

for payment for services, goods, works – 110;
for wages – 60;
for fees and taxes – 40;
for payment of bank interest on a loan - 11;
for the acquisition of intangible assets and fixed assets – 50;
for loan repayment – 100.

Total costs – 371 thousand rubles.

Thus, we end up with:

NCF = 547 – 371 = 176 thousand rubles.

However, our second example is evidence of a rather superficial approach to the financial analysis of the state of the enterprise. Accounting should always be kept by type of activity, based on data from management and analytical accounting, order journals, and the general ledger.

Experienced financiers and managers advise: in order to clearly control the flow of funds, enterprise management should constantly monitor the influx of funds from operating activities, studying the sales schedule broken down by client and by each type of product.

Of the many expense items, you can identify 5-7 of the most expensive ones and track them online. It is not advisable to detail the report on cost items too much, since dynamically changing small quantities are difficult to analyze and can lead to incorrect results. In addition, there are problems with regularly updating information for each item and comparing them with accounting data.