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Does the company have the ability to meet its short-term financial obligations, such as interest payments, from its operating cash flow?
Can it continue to meet these obligations without reducing its operating flexibility?
Did the company pay dividends from internal free cash flow, or did it have to rely on external financing?
If the company had to fund its dividends from external sources, is the company's dividend policy sustainable?
Does the company have excess cash flow after making capital investments?
Is it a long-term trend? What plans does management have to deploy the free cash flow?
Traditional SCF Format Net Income + Depreciation and Amortization Deferred Taxes Gains/Losses Changes in Working Capital = Cash Flow from Operating Activities - Purchases of Long Term Assets + Sales of Long Term Assets = Cash Flow from Investing Activities + Sale of Stock + New Borrowing - Debt Payments - Dividends - Stock Repurchases = Cash Flow from Financing Activities Cash Flow from Operating Activities + Cash Flow from Investing Activities + Cash Flow from Financing Activities = Net Change in Cash
Recast SCF Format Net Income + Interest Expense (Net of Tax) + Depreciation and Amortization Deferred Taxes Gains/Losses = OCF before Working Capital Investments Changes in Working Capital = OCF before Investment in Long Term Assets - Purchases of Long Term Assets + Sales of Long Term Assets = FCF Available to Debt and Equity - Interest Expense (Net of Tax) - Debt Payments + New Borrowing = FCF Available to Equity + Sale of Stock - Dividends - Stock Repurchases = Net Change in Cash OCF = Operating Cash Flow FCF = Free Cash Flow
Summary
Examine cash flow from operations before investment in working capital to verify the company is able to generate a cash surplus from its operations. Examine cash flow from operations before investment in long term assets to how the firms working capital is being managed and to see if the company can invest in long-term assets for future growth.
Summary
Examine free cash flow to debt and equity holders to asses a firms ability to meet its principal and interest payments. Examine free cash flow to equity holders to asses a firms ability to sustain its dividend policy. All cash flow analysis must be done taking into consideration the companys business, its growth strategy, and its financial policies.