Operating Cashflows vs Dividends Paid
Quote:
Originally Posted by
winner69
Snoops - as I said yesterday depreciation and amortisation (and a few other things) are not part of (ie not included) in Operating Cash Flows ...and yes PPE is an investment to hopefully produce future profits (be it replacement stuff or some new technology)
You will note I have kept cash movements for acquisitions and funding seperate.
What the top half of the table reflects is how much cash (not profit) AWF generate from day to day operations (Operating Cash Flow) and what they do with it like buy some new computers and stuff (PPE) to keep the business going and then how much they give to shareholders as way of dividends. Anything left over either used to reduce debt or saved up for a rainy day.
So what I’m saying Snoops is that in FY17 they generated $7.7m in cash from day to day operations of which they spent $3.0m on new computers and other PPE which leaves $4.7m spare and then they gave shareholders $5.3m which was $0.6m more than they generated. See where I am coming from. They have done this for 3 of the last 4 years - to the tune of $3.8m in total. Where did the divie money come from I ask
But FY18 will be different eh
PS - all numbers from Cash Flow Statements - just set out different
Winner, I am not saying you are wrong. I am saying you can look at the cashflows in an alternative way.
1/ First you pay out your dividends out of operating cashflow. This can be covered with no borrowing.
|
1HY2015 |
2HY2015 |
1HY2016 |
2HY2016 |
1HY2017 |
2HY2017 |
1HY2018 |
Sum Total |
Net cashflow from operating activities |
$8.330m |
-$2.145m |
$6.495m |
-$4.437m |
$11.399mm |
-$3.773m |
$11.879m |
+$27.748m |
Dividends paid |
-$1.986m |
-$1.916m |
-$2.660m |
-$2.392m |
-$2.636mm |
-$2.602m |
-$2.705m |
-$16.987m |
You can see that there is plenty in the kitty to do this, not withstanding operating cashflow tending to be negative in the second half year.
2/ Next you borrow some money to add to what coperating cashflow you have left to make up what you need to invest in P,P & E.
Looked at this way, the borrowing is done to 'invest in the business'. Although the business has lost the balance of their cash generated and now have a bank loan, they have gained 'some new computers and stuff '. And for each $1 invested in PP&E, they will hopefully earn a lot more than $1 in the future from each $1 that has been invested. Looked at this way AWF are optimizing their balance sheet gearing and planning for the future - being responsible. Sounds much better than 'drawing down the house mortgage to pay the grocery bill', which seems to be the viewer angle you are coming from with the same data.
SNOOPY
When cash isn't just cash.
Quote:
Originally Posted by
winner69
Like that bit about about drawing down the mortgage to pay for the groceries, quite good ......although a better analogy might be increasing the mortgage to buy the computer or fridge or TV that needs replacing (also bought by increasing the mortgage a few years earlier). That’s being responsible by optimising the household balance sheet!
The concept of analysing a company by looking at cashflow has a certain raw appeal. Profits are ultimately important. But a company can manipulate declared profits several ways:
1/ By classing a bad debt as collectible when it is not.
2/ By carrying goodwill on the books using optimistic future sales scenarios when those sales levels will be very difficult to achieve.
3/ By setting up bad debt provisions that allow the shifting of profits from one financial period to the next.
However, cashflow is 'day to day' important, because having a cash dividend deposited into your bank account is a gold standard kind of investment return that cannot be manipulated. Money in your bank account is tangible and spendable, contrasting with declared profits that amount to an indirect promise of a return of cash in the future.
I want to carry on with Winner's analogy and imagine you as a homeowner are running an in house business putting your tweenagers out to work selling lemonade at the end of the driveway, while simultaneously giving them free spending (pocket) money. Now tweenagers demand some pocket money, and generally use their accumulated (lack of) wisdom to make poor decisions and waste it, or use it on instant gratification. Nothing wrong with that, it is all part of the learning and budgeting experience. From a homeowners perspective, the pocket money paid out is analogous to a company paying dividends to shareholders. Once the pocket money is paid out, all control of what happens to it passes from the homeowner's hands.
To support the lemonade venture, our homeowner uses some leftover household cashflow, plus bumps up the mortgage to buy a brand new fridge. As well as being more efficient than the original fridge, it is much bigger to hold the vast litres of ice cool lemonade to satisfy the summer satiated pedestrians walking by the end of the driveway. Selling lemonade becomes a highly profitable home business for our homeowner. When discussing their finances, the homeowner could say:
1/ they borrowed money from the bank to pay the tweenagers pocket money (which doesn't sound too responsible) OR
2/ they could say money was borrowed from the bank to buy a new fridge to support the home business venture (which sounds much savvier).
But both of these explanations could be seen as correct though, depending on how an outside observer chooses to see the historic path, along which the homeowners cash was spent.
On the day cash is cash. Whether you give $500 out as pocket money, or put that $500 towards a new fridge, $500 cash will come out of the household bank account. However, no business person plans to invest $500, with a business plan to only recoup $500 from that investment. There has to be a profit at the end of the year. It is the new fridge that enables the selling of the lemonade and our little home business able to operate. After eight years, perhaps a new fridge will be required to allow the lemonade business to continue. Our hapless home owner may once again be forced to draw down the house mortgage to buy it. At this point the value of the original big fridge has been lost (cash value zero). But what hasn't been lost is the utility of using that old fridge over the preceding eight years. Yes the original big fridge capital has gone. But the cashflows from selling the lemonade over an eight year using that fridge were very real.
So what is the moral of this story? On the day, the negative cash effect of giving tweenagers pocket money OR spending that money on a new fridge is the same. But over time, the fridge delivered a positive cash return to our homeowner, while the pocket money simply disappeared (from our homeowners perspective). Thus although all cash starts out as being equal, over time it can end up not being equal. Or coming back out of the analogy, offsetting cash taken in over a one year period with cash spent on something that will produce a return over a multi year period is akin to subtracting apples from apples (from a snapshot perspective) but subtracting oranges from apples (from a multi year perspective).
SNOOPY