How to read a statement of cash flows?
I think the best way to learn how to read
a cash flow statement is to go through as
many real-life examples as you can!
I have done a previous video about the
cash flow statement of oil and gas company Shell,
and that of electric car company Tesla, both of which
I recommend you to watch.
Let me show you in this video another example
of how a cash flow statement works, by reviewing
the cash flow statement for Walmart.
I don't own shares in Walmart,
this video is purely for educational purposes.
One of Walmart's key objectives is a financial one:
to deliver results and operate with discipline.
In the "Walmart by the numbers" one page summary
in the front of the annual report, a lot of
emphasis is put on revenue performance (which is
on the income statement, which I will talk
about in an upcoming video), as well as on
cash flow performance, more specifically the
record operating cash flow and the 44th year
of annual dividend increases to shareholders.
This video will show you where and how you can get
the picture of cash flow from
Walmart's financial statements.
What a company shows by publishing a
cash flow statement in an annual report, is how they got
from the cash balance on the previous balance sheet,
to the cash balance on the latest balance sheet.
In the case of Walmart, the fiscal year runs from
February 1st to January 31st, which makes it
possible to review the FY17 annual report
in the month of May 2017, as the fiscal year 2017
has long been closed for Walmart.
The increase or decrease between the previous and
current cash balance is called cash flow.
It consists of three main categories:
Cash From Operating Activities,
Cash From Investing Activities,
Cash From Financing Activities.
For a company like Walmart, which has US dollars
as the reporting currency and most of its
business activity in the US, but also has
international operations outside the US where
different currencies are in use, there can be an effect
of those exchange rates on the
cash balance of your balance sheet.
This line item is more of a technical finance nature
than of an operational nature.
We will review Walmart's cash flow statement for 2017.
Walmart started the year with $8.7B in cash
and cash equivalents, and ended the year with $6.9B.
The total cash flow was therefore a net cash outflow
of $1.8B. What were the sources and uses of cash,
that add up to this $1.8B net cash outflow?
Cash From Operating Activities was an inflow of $31.5B.
Yes, you heard that right, $31.5B
generated from Walmart's operating activities.
Cash From Investing Activities was an outflow of $14B.
Cash From Financing Activities was an outflow of $18.9B.
Recalculating non-US dollar cash balances to US dollars
with current exchange rates
had a negative effect of $400 million.
So that's the top level cash flow picture:
Walmart generated a very large cash inflow
from operating activities, Walmart returned much of
that cash flow to shareholders in
the cash from financing activities line, while
at the same time investing in the future of
the business.
The cash balance at the end of the fiscal year
was lower than at the start, but in absolute terms
still very sizeable at $6.9B.
Now we go one level deeper, discussing each
of the cash flow categories:
Cash From Operating Activities,
Cash From Investing Activities,
and Cash From Financing Activities.
Cash From Operating Activities is roughly
the cash inflow from customers paying the company
minus the cash flow of the company paying for
purchases from suppliers, minus
the cash flow of salaries paid to employees, and minus
the cash flow of taxes paid to governments.
For most mature companies in good health,
the cash flow from operating activities is
a net cash inflow.
Walmart is a very profitable company.
If we take the "income from continuing operations" line
as a start, we see that this number is $14.3B in 2017,
which is lower than it was in 2016 and 2015,
but in absolute terms still very high.
When we look at the bottom of the page, we see
that net cash provided by operating activities is
far higher than the income from continuing operations.
And while the income from continuing operations
is lower than in previous years, the net cash provided by
operating activities is higher than in previous years.
So how do we get from the income
from continuing operations to
net cash provided by operating activities, and why was
fiscal year 2017 so exceptionally good for Walmart?
Walmart and many other companies use the
indirect method of cash flow reporting: you start with
the net income, and then make adjustments
to reconcile that net income to CFOA.
First off, you add back depreciation and amortization,
$10.1B in 2017 for Walmart.
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
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 other line items of significant size in the
reconciliation to CFOA are related primarily
to working capital.
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 down,
then cash goes up.
During the year ended January 31st, 2017,
Walmart freed up $1B in cash
from strong inventory management.
If inventory goes down, cash goes up, hence
the positive number on this line item to signify
a source of cash.
The effect of accounts payable on cash flow
is even larger. If you purchase goods from suppliers,
then you receive invoices from those 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 also a positive line item for cash flow.
The same goes for accrued liabilities.
If you accounted for certain types of expenses
in the income statement for which you have
not yet made a payment, then those amounts
still to be paid show up on the balance sheet
as accrued liabilities.
Walmart's accrued liabilities on the balance sheet
have gone up by more than $1B year-over-year,
therefore this shows on the cash flow statement
as a source of cash, or cash inflow.
For Walmart, the main items in the accrued liabilities
category are accrued wages and benefits,
and accrued self-insurance.
In summary: under the indirect method
of cash flow accounting, you reconcile from income
from continuing operations to net cash provided
by operating activities, by adding back non-cash
expense items such as depreciation and amortization,
as well as changes in working capital balance sheet
line items such as inventories and accounts payable.
Walmart highlights the $31.5B of operating cash flow
in 2017 as one of the main achievements
in its "Walmart by the numbers" one page summary.
Time to move to the next section of the
cash flow statement: Cash From Investing Activities,
a net cash outflow of $14B in 2017.
In most years, this category consists mainly of
the three items at the top: the cash outflow
for payments for property and equipment, and the
cash inflow for proceeds from disposal of either
property and equipment, or certain operations.
The first line of those three is what is often called
CapEx spending, or Capital Expenditures.
Walmart has four CapEx categories:
new stores and clubs, remodels and ustomer initiatives,
e-commerce and technology, and
logistics and maintenance.
Only a few years ago, that first category of
new stores and clubs accounted for almost
half of the CapEx spending.
However, that is not the picture we will see if
Walmart executes its current CapEx
spending plan for FY18.
New stores and clubs, which was the largest
CapEx spending category in FY15, will be the
smallest spending category in FY18.
Most of the CapEx spend will now go to remodels
and customer initiatives, logistics and maintenance,
and e-commerce and technology.
In short: Lower overall CapEx spending, and a
reallocation of the spending in line with
the new strategic priorities.
FY17 also saw Walmart complete an acquisition:
Jet.com, a US based e-commerce company, for
a total purchase price of $2.4B.
The focus on e-commerce is therefore reflected twice in
CFIA: in both the CapEx as well as the acquisitions line.
In the annual report, two pages are dedicated
to this topic, right after the "Letter to the Shareholders"
at the very front.
Third section of the cash flow statement:
Cash From Financing Activities, a net cash outflow of
$18.9B. The largest line item here in 2017 was $8.3B
for Walmart buying back its own shares,
well above the level of buybacks in the years before.
A recurring amount, that generated a cash outflow of
$6.2B is the dividend payment by
Walmart to shareholders.
$2 dividend per common share in FY17, up from
$1.96 in FY16, and $1.92 in FY15.
And guess what, in FY18, Walmart raises its dividend
to $2 and 4 cents per share, paid
in quarterly installments of $0.51.
With this, Walmart has increased the annual dividend
for the 44th consecutive year.
A third line item worth noting is the repayment of
long-term debt of $2.1B in 2017, which reduces the
amount of long-term debt on the balance sheet to $36B.
Once you have the three main 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 plus the
opening cash balance equal the ending cash balance.
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.
Walmart generated a very large cash flow
from operating activities.
Walmart returned much of that cash flow to
shareholders through both share repurchases
and dividends, while at the same time investing in the
future of the business through CapEx and acquisitions.
Thank you for watching!
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