If you used to read
company’s financial statement, you will know that the Indonesian standard
format of financial statement comes as: 1. Statement of Financial Position
(Asset, Liabilities, and Equities). 2. Statement of Profit and Loss (Revenue,
till Net Income). 3. Statement of Changes in Equities and lastly. 4. Statement
of Cash flows. Normally, if writer do a quick financial statement analysis, we
only look at asset changes to company’s net income, and seldom look to
Statement of Cash Flows, then the question comes. What is the difference between
Statement of Cash Flows and Statement of Profit and Loss? What if the company
made profits in Statement of Profit and Loss, but the cash received (stated in the
Statement of Cash flows) is smaller? Then, What if the company stated negative cash flows?
And so on.
So, before we
continue, let’s look at the definition of cash flow from the beginning.
Statement of Cash
Flows is similar to financial statement entirely, but the information stated
only limited to the amount of Rupiah (or Dollar) that actually received or paid
by company in certain period. In this case, if the company made revenues of
Rp100 in first quarter 2018, that Rp100 could be received (in cash) in the
second quarter, or later.
The simple analogy
is: Let’s say you are a fund manager buying A company shares, and A company
announced a Rp100 cum dividend payment on 15 March, and the payment date on 10
April. Because you still hold A company shares until the cum dividend date
passed, you will be automatically deserved for the dividend. Therefore, when
you make a financial statement of the first quarter period (as 31 March) to be
presented to your client, in the statement, the dividend income of Rp100 can be
stated, but in the statement of cash flow that Rp100 cannot be stated. Why?
That’s because the dividend will be paid or transferred to your account on 10
April, so for the 31 March financial statement, the money is not received yet.
Once more, even as
31 March the dividend is not definitely received, but you are certainly get the
money because you are still holding the A company shares until the cum dividend
date passed. So, in the financial statement you made, you can state the Rp100
dividend income. Got it?
Beside the condition
where ‘revenues are stated first, meanwhile the money received after’, the
condition of ‘money are received first, but cannot be stated as revenues’ could
also happen. For example, a developer company, where they received cash money
from customers who buy properties, but the housing/office/apartment units are
not handed-over (still in build progress), so the money received still cannot
be stated as revenues, otherwise should be stated as down payment, accounted as
debt. Thus, as seen in financial statement, company will receive some cash
money from customers, but revenues are less than the money. The developer
company can acknowledge the money from customers as revenues, if the property
units has already handed-over.
Hence, finally the
company statement of cash flows, in this case the cash flows from operating
activities, will never be the same with its statement of profit and loss.
Additional factors such as bank administrations, if you transfer/deposit to a
bank, the money will be effective the next day (for example, if you buy an
apartment unit for Rp1 billion cash, then it is almost impossible to pay with
paper money right? Otherwise, you have to pay using bank transfer). This can also
make discrepancy between statement of profit and loss and statement of cash
flow from operating activities. In this case, you don’t have to worry if
company booked some profit, but in statement of cash flows, the amount of money
received is less, even more assuming the financial statement was made-over.
Based on writer experiences, it is rare that financial statement be made-over
from the statement of cash flows part. When the financial statement is
made-over, for an experienced analyst, it’ll be easily noticeable from the
statement of profit and loss, without seeing the statement of cash flows
anymore.
The Importance of
Cash Flow Analysis for Long Term Investing
Because of that, as
conveyed before, when doing a quick analysis, usually writer stops at net
income numbers. However, for a consumer goods company, where customers buy the
daily needs products, the company will directly receive cash payments and that
payments can be directly stated as revenues cause the goods are already sent to
customers, after that this statement of cash flows would be important to
analyze. So, you can be critical if, for example Indofood CBP (ICBP) reported
revenues of Rp1000, but receivable from customers in the statement of cash
flows is only Rp500. Because ICBP sells Indomie and sorts of, which the price
per pack is cheap, then people buy it cash, and I never heard before that
people buy Indomie in Alfamart but the goods are delivered a month after.
 |
| Fast moving consumer goods of PT Indofood CBP, Tbk |
Differently, let’s
say Waskita Karya (WSKT), where the company booked revenues of trillions of
rupiah just from one tollway project. Because the money is huge, so that money
would be actually received by company in a few weeks to several months after
(the process of fund disbursement will need time). So ICBP revenues should only
have a little discrepancy with its statement of cash flows. Simply, if other
sector company used to have a slow turnover, in which WSKT won’t receive
payments every day (if there is no projects, or the projects are still in
progress, WSKT will not receive advanced payments), whereas consumer goods
company has a fast turnover, as can be assumed that ICBP will receive cash
payments every day. And you can check by yourself to the end of financial
statement, the ICBP revenues has not much different to its statement of cash
flows.
Beside consumer
goods company, banking company normally has slight differences between
statement of profit and loss and statement of cash flows. They sell services
(mortgages, administration services, etc) directly to customers who pay
interests cash, and customers get direct services. Therefore, banks could
actually booked the money as revenues.
For companies other
than consumer goods and banking sectors, statement of cash flows is not so
important to come to attention, because it doesn’t describe the company’s
ability in making profits or earnings power. The most important thing in
valuing the intrinsic value of a company is its track record of net profits,
growth of equities form year to year. Nevertheless, statement of cash flows
become very important to analyze if, 1. You are planning to buy the company
wholly/ become a majority shareholder of 2. You plan to forever hold the shares
and make it a dividend machine.
If you owned and
control A company, you will have the access and also responsible to the
in-and-out cash flows, and maybe you will confuse yourself when you have to pay
for suppliers, but sales money is not received. If you only buy one lot of A
shares, you don’t have to worry about this. Similar if you only buy shares to
get its dividend every year, the company would be able to pay dividend
regularly not only when the company consistently making profits, but also when
the cash flow is good and align with its statement of profit and loss. Because
paying dividends should use cash money right?
Unfortunately, by
far, if writer was asked what shares that can be hold forever in Indonesia stock
market, whether we buy it in a big sum/majority or even only 1 or 2 lots, then
based on forever holding shares criteria we have ever discuss here, writer
don’t have many options beside consumer goods companies or banking companies.
Otherwise, other sectors shares, although we can hold it for years, usually
there will be time to sell it back. Back again, cash flow analysis only
important for consumer goods companies and banks. Thus, for other sectors
companies, we can save time by analyzing limited to its comprehensive statement
of profit and loss.
By the way, writer
intentionally writes about cash flow now because I just realize, since 2010
till now, we hasn’t discuss about cash flows. So, afterwards for you whom have
read all articles in this blog from the beginnings till now, can give us
suggestions about what writer hasn’t write before. Next week, we will share
another stock analysis.
Any inquiries, send email to teguh.idx@gmail.com.
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