The best way to learn how to read
a cash flow statement
is to go through real-life examples
of companies you have heard of!
Let me show you in this video
what a cash flow statement is,
and how the cash flow numbers
look for Tesla.
I don't own shares in Tesla, nor do I own a Tesla car.
One or both of these might change in the future!
If so, I will let you know in the comments
below this video.
Let's start with the purpose of the cash flow statement.
What a company shows by publishing
a cash flow statement
in an annual report, is how
they got from the cash balance
on January 1st (on the previous balance sheet), to the
cash balance on December 31st
(the latest balance sheet).
The increase or decrease between the January 1st
and December 31st cash balance is called
cash flow.
It consists of three categories:
Cash From Operating Activities,
Cash From Investing Activities,
Cash From Financing Activities,
or terms with slight variations on that wording.
We will review Tesla's cash flow statement for 2016.
Tesla started the year with $1.2B
in cash and cash equivalents,
and ended the year with $3.4B.
The total cash flow was therefore
a net cash inflow of $2.2B.
Now where did that
$2.2B in cash flow come from?
Cash From Operating Activities was an outflow
of $100MM, or $0.1B.
In finance, we put negative
numbers between brackets.
Cash From Investing Activities was an outflow of $1.4B.
Cash From Financing Activities was an inflow of $3.7B.
So that's the top level cash flow picture:
Tesla attracted financing in the form of debt
or equity which allowed them to invest.
Tesla ended the year with more cash
than they started with, to continue investing and running
everyday operations.
Now we go one level deeper,
discussing each of the cash flow categories.
Cash From Operating Activities
will take the vast majority of the attention,
Cash From Investing Activities
and Cash From Financing Activities
are fairly straightforward for
Tesla in 2016.
Cash From Operating Activities is roughly
the cash inflow from customers paying the
company minus the cash outflow
of the company paying for purchases from suppliers,
minus the cash flow of salaries paid to employees,
and minus the cash outflow of taxes paid to
governments.
For most mature companies in good health,
the cash flow from operating activities is
a net cash inflow.
Tesla is a fast growing company
in an early phase of its growth curve.
It is therefore very understandable
that Cash From Operating Activities is not yet positive.
CFOA was a cash outflow of $124MM in 2016.
What were the main items in that?
Tesla and many other companies
use the indirect method
of cash flow reporting: you start with
the net income or in Tesla's case
net loss of $773MM for the year,
and then make adjustments
to reconcile that net loss to CFOA.
Let's step back for a minute,
and talk about profit versus cash flow.
The way you measure profitability
is different from the way you measure cash flow.
In the profit view of a company,
the matching principle is very important:
matching the revenue and expenses
to the period in which they occur.
In the cash flow view of a company,
the moment when cash is flowing in,
and cash is flowing
out of the company is key.
Both views give you insights
into the financial performance of a company.
Which adjustments are needed
to go from net income to CFOA?
It's a long list, let's walk through the biggest line items
in terms of monetary amount.
First off, depreciation and amortization.
This number was deducted as a cost
when net income was calculated in the profit and loss
statement, but as you do not pay
depreciation and amortization to anybody (it is what we
would call in finance a "non-cash expense"),
you have to add back the amount if you want
to get to a cash flow based view.
The second adjustment is stock-based compensation.
This is similar to depreciation:
stock-based compensation was recorded
as a cost when preparing
the profit and loss statement,
but as it is a compensation that is paid in stock and not
in cash, we need to adjust for this
to get to a cash flow based view.
The next six line items, each of them below $100MM,
are of a similar nature: they are
a plus or minus in calculating net income,
but have to be adjusted for in the cash flow
statement as no cash has changed hands.
The section at the bottom has some big amounts,
related primarily to working capital increases
or decreases.
$2.5B in net cash outflow due to inventories
and operating lease vehicles.
How does this work?
Remember that the cash flow statement explains
how you got from the cash balance on the previous
balance sheet to the cash balance
on the current balance sheet.
If inventory on the balance sheet goes up,
then cash goes down.
For the year ended December 31st, 2016,
Tesla produced approximately 84,000 vehicles, an
increase of 64% from the prior year,
and has a target to increase
the overall vehicle production
level to 500,000 vehicles in 2018.
It's logical that inventory levels go up
if a company is expanding at those rates.
If inventory goes up, cash goes down,
hence the negative number on this line item to signify
a cash outflow.
There is a partial offset in the accounts payable
and accrued liabilities line.
If you order more from your suppliers
to keep up with increased vehicle production, then
you receive more invoices from suppliers.
If you have not paid those invoices yet
by the end of the period, they will be reported
as accounts payable on the balance sheet.
If accounts payable go up,
then cash goes up,
hence this is a positive line item for
cash flow.
The last item that I would like to highlight
in this section is customer deposits.
Tesla is taking orders for Model 3,
and asks customers for a deposit at the time they place
an order for a vehicle.
The amount of customer deposits on the balance sheet
has more than doubled from the end of
2015 to the end of 2016, it is recorded as
a liability on the balance sheet as the company
has received the cash and owes the customer
a vehicle in the future.
The increase in customer deposits is reflected
in the cash flow statement as an inflow, it
increases Tesla's cash balance.
Time to move to the next section
of the cash flow statement:
Cash From Investing Activities,
a net cash outflow of $1.4B.
This is fairly easy to explain.
Almost the whole category consists of purchases
of property and equipment.
Factory construction is on track
to support the expected growth in vehicle production
and deliveries.
Third section of the cash flow statement:
Cash From Financing Activities, a net cash
inflow of $3.7B.
$1.7B from issuing common stock or equity.
$1B as the net cash inflow
between proceeds and repayments
of convertible and other debt.
$769MM cash inflow from
collateralized lease borrowing.
Once you have the three sections
of the cash flow statement
(operating, investing, financing),
there is an important closing step:
ensuring that the net increase or decrease in cash
and cash equivalents of $2.2B
plus the opening cash balance of $1.2B
equal the ending cash
balance of $3.4B.
If you are studying for an exam,
or preparing cash flow statements in real life, please
make sure you include this finishing touch
in your cash flow statement preparation!
Back from the detail
to the high level cash flow statement overview.
Tesla attracted financing in the form of debt and equity
which allowed them to invest.
Tesla ended the year with more cash
than they started with,
to continue investing and running
everyday operations.
Thank you for watching!
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