Designs of Company's Cash Flow Indicators & Case Analysis

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Designs of Company's Cash Flow Indicators & Case Analysis

YU Zhong-fu
College of Economic and Management, North China Electric Power University, Beijing, China

Abstract: As an important means to analyse a company's operation conditions, cash flow indicator based on cash basis, which cannot easily be manipulated, is closely related to its financial performance. According to the constructed cash flow indicators on operating activities, investing activities and financing activities, and data gathered from Datang International Power Generation Company Limited, the article makes a general analysis of financial conditions for the purpose that exploring the considerable role the cash flow indicators play in assessing a company's financial performance.

Key words: cash flow; financial efficiency; designs of indicators; case analysis

Construction of Cash Flow Indicator
Cash flows consist of operating activities, investing activities and financing activities. This part is mainly concerned with how to use financial performance indicator to make quantitative analysis of cash flows. 1.1 Indicators of Cash Flow from Operating Activities

Operating activity is one of the company's major business activities. The analysis of operating activities should be covered of earnings quality, payment capacity and solvency. 1.1.1 Earnings quality

Cash flows from operating activities mainly come from sales revenues, which means that the "cash received from major operations ratio" can be chosen to measure the earnings quality as following: Cash Received from Major Operations Ratio=[pic]

1.1.2 Payment capacity
When revenues from major operations cover most of a company's revenues, the payment capacity can be reflected in cost of goods sold in the cash flow statement. Cash Paid for Cost of Goods Sold Ratio=[pic]

1.1.3 Solvency
The solvency of a company can be divided into short-term solvency and long-term solvency. Accordingly, the indicators of solvency can be constructed as followings: Cash Flow to Current Liabilities Ratio =[pic]

Cash Flow to Total Liabilities Ratio
=[pic]
1.2 Indicators of Cash Flow from Investing Activities
The cash flow from investing activities can be analysed concerning the development capacity and earnings quality. 1.2.1 Development capacity
Development capacity means a company's potential ability to accumulate wealth and to expand the scale by operating activities. In order to ensure the continuous investment capacity, a company would have to get sufficient cash flow to maintain the existing capital assets and necessary financial expenditures. The development capacity can be described as: Operating to Investing Ratio=[pic]

1.2.2 Earnings quality
The quality of earnings from a company's investment activities is directly related to the economic interests of its creditors and investors. So the cash investment income ratio is used to measure the risk of investing activities, with which a company can evaluate the quality of investment income. Cash Investment Income Ratio=[pic]

1.3 Indicators of Cash Flow from Financing Activities
Both the financing capacity and the funding resources should be considered in analysing cash flow from financing activities. 1.3.1 Financing capacity
A company should predict the accessible external funds based on its current financial performance. Whether it can meet the goal to raise enough funds reflects its external financing capacity. External Financing Ratio=[pic]

1.3.2 Funding resources
The risk of financing activities varies among different funding resources. The funding resources can be divided into capital funds and debt funds. The latter should be taken into consideration more seriously because of its higher financial risk. The funding resources can be measured as: Debt to Equity Ratio=[pic]

In sum, the cash flow indicators are constructed as shown in the following table:

Table 1 Quantitative analysis of cash flow indicators
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