Introduction Optional Reading Workshop Content - Bivio

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Welcome to Evaluating Management Session 5<strong>Introduction</strong>Today we are going to look at using Cash Flow to evaluate management. There are anumber of definitions for Cash Flow and differences of opinion about how to interpretCash Flow. Getting into these is far beyond the scope of this workshop. Therefore, I amgoing to present an example using the methodology described in detail in a recentworkshop.In October, Diane Graese presented an excellent workshop on using the Statement ofCash Flows (SCF). The SCF workshop used examples of company annual financialstatements with three years of data.The SCF workshop ended with a final exam. For the exam Diane provided a copy of theCONSOLIDATED STATEMENT OF CASH FLOWS and a copy of Section 1 of theSSG for Ballantyne Of Omaha Inc. (BTN) Then she asked:“What conclusions do you draw from each? Is this company worthy of more study andpossibly investment?”Three people responded with answers to the questions. Then Diane provided a copy ofher “ANSWER to Final Exam.”This concluding session of the Evaluating Management <strong>Workshop</strong> describes howCash Flow data provided by Morningstar and Reuters could be used, instead of theCONSOLIDATED STATEMENT OF CASH FLOWS, to answer the Final Examquestions.Review the SCF workshop Final Exam.Three files are attached to this message. They are the two files that were provided for theFinal Exam (forumhandout3.pdf and forumhandout4.pdf) plus the “ANSWER to FinalExam” (forumexamanswer.pdf). I recommend printing these files.Read the “ANSWER to Final Exam” in order to gain an understanding of how data in theCONSOLIDATED STATEMENT OF CASH FLOWS was processed and used. Thisprovides the basis for appreciating the pros and cons for using data provided byMorningstar and Reuters.Using Morningstar Data.The Morningstar and Reuters sites provide more historical data, ten years and five yearsrespectively, but fewer details than company financial statements. Even so, it will beshown that there is enough information to perform most of the analysis methods
described in the SCF workshop. In fact, the format used by Morningstar is very similar tothe format used in the SCF workshop.Cash Flow from OperationsWe will start by concentrating on Cash Flow from Operations (CFO). First, just quicklyobserve the large number of entries in the CONSOLIDATED STATEMENT OF CASHFLOWS. Then look at the second page of the ANSWER and notice how data has beencompressed into a much less cluttered format that draws attention to the “Difference”entry. Morningstar uses a similar format.Point you browser to: www.morningstar.comEnter BTN in the Quotes box (upper left).Scroll down a little until you see Financial Statements on the left. Click on it.Then click the tab for 10-Yr Cash Flows.The table has data for 1996, 1997 and 1998 on the far left. Not exactly the same format asdata on the second page of the ANSWER printout, but close. I do like the format in theANSWER printout. My eye is drawn to the “Difference” entry more than to theequivalent sum of “Deferred Taxes” and “Other” at Morningstar. Even so, the ability toquickly see data for ten years without having to enter data manually appeals to me for aninitial analysis.Read the portion of the ANSWER printout that discusses the large increases in Inventoryand Receivables. It mentiones that ratio analysis could have been used to determine DaysSales and Days Receivables outstanding. This would required additional calculations andwas not deemed necessary for the Final Exam.The situation is somewhat different when using the Morningstar Cash Flow table. Thechanges in Inventory and Receivables are not displayed. However, values for Days Salesand Days Receivables outstanding are provided in the Efficiency Ratios table. Noadditional calculations are needed.To use Morningstar to check if there are increases in Inventory and/or Receivables, clickfirst on Key Ratios and then the Efficiency Ratios tab.Unfortunately there is no data prior to 1997. Even so, the significant increase in DaysSales and Days Inventory from 1997 to 1998 is apparent. This provides the same typewarning signals that are then discussed in more detail in the “ANSWER to Final Exam.”Now return to Financial Statements and 10-Yr Cash Flows.Cash Flow from InvestingThe values for Investing activities closely match those in the printout of theCONSOLIDATED STATEMENTS OF CASH FLOWS. Some small values round out to
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Introduction Optional Reading Workshop Content - Bivio

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