Cash Flow - Financial Characteristics - Analysis of the company, Investing in Stock Market Video Lecture | Investing in Stock Markets - B Com

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starting hello everyone thank you so
much for taking time out to attend this
webinar my name is Karthik rang upon a
podracer oh the family the focus for
today's webinar is to throw some light
on the cash flow statements and
understand how the cash flow statement
can actually help you while making a
investment decision in when I say
investment well when you think of
investing in a stock for a long-term
basis right when you are probably
building a portfolio so I mean if you I
would assume that you are fairly
comfortable with understanding a cash
flow statement if you're not then don't
worry we have this module on fundamental
analysis it starts from the basics and
goes all the way up to conducting a DCF
on a stock DCF is when you want to get a
perspective on the valuations of a
company right so this got a ton of
content including the cash flow
statements for those of you who are not
familiar with cash flow statements I
just write oh I will attempt to give you
a quick overview of what a cash flow
statement is right so of course all the
contents are there here in the chapter
chapter number 8 you can go through it
in leisure right now all right so let me
get to the main part okay so any company
that you take up right any company on
this planet whatever activity that they
do it has to be classified under three
main one of the three main categories
right I categories of activity that
would be the operational activity the
investing activity and the financing
activity so any activity that a company
does has to fall under
one of these categories operational
activity is the core of the company
right
so let's assume there is a company which
manufactures Footwear now manufactures
and distributes and sells Footwear now
the core operations of this company as
you can imagine would be manufacturing
sourcing the raw material manufacturing
you know the footwear distributing it
across the country maybe running some
promotional activity advertisements
etcetera etcetera and eventually selling
the footwear now this would belong this
would be categorized as the core
operations of the company right so all
such activity you know would would be
categorized as operational activity now
in order to manufacture Footwear the
company has to have a manufacturing
plant that's a given right so it has to
have a manufacturing plant it needs to
have a sourcing plant it needs to have
some sort of R&D and you know there's
some investment which goes into
manufacturing these things so all those
investments which aid the operations of
a company is called the investing
activity for example this company could
set up our a leather tanning unit to tan
the leather and give it some sort of
color so so the act of investing in a
unit in a plant in a machinery you know
is called the investing activity of a
company now if a company is you know
very profitable they can fund most of
their investing activity but more often
than not you know companies resort to
taking external borrowing it could be
from Allah you know by floating a bond
or it could be by you know approaching a
bank right so all the loans that they
take out and you know a company will be
continuously taking out loan repaying
loan and you know paying out dividends
receiving dividends from you know
whatever investment they've made so all
activity related to finance is
categorized as financing activity so I
mean end of the day whatever that
accompany it does is either an operating
activities either a part of the
operating activity or
a part of the investing activity or a
part of the financing activity is this
it has to be categorized as one of these
things now here's the beauty of these
activities now each activity either
consumes money or you know it produces
money it generates cash for example if
this company is you know let's say it's
selling 10 million units of footwear and
it's making a certain profit out of it
then we tend to say that the operations
are successful and the operation is
generating a positive cash flow right so
it's generating a positive cash flow now
investing activity let's say I'm
investing in a plant I'm investing in a
machinery so money is going out of the
company and therefore we tend to say
that investing activity is consuming
cash now now here's a situation where
let's say a company is bought a
machinery it's kind of you know served
its purpose and the company wants to
sell it off right so maybe there's
another small company which wants to buy
this machinery now in such a case the
asset which the company has invested in
is being sold to another company now the
proceeds of the sale produces some
amount of cash now this is called this
is a situation where investing activity
has produced cash right
likewise in financing activity let's say
about this company goes and approaches a
bank to raise a certain amount of loan
now in this situation
cash is coming into the company in the
form of loans so we say financing
activity is producing cash now if the
company is reaping money or repaying its
loan then we tend to say that you know
financing activity is giving out cash or
you know yeah so just giving out cash so
yeah in summary each activity each of
these three acting activity can either
generate cash or consume cash now here's
a very very important point that I want
you to remember any company that you
intend to invest in always look at the
cash flow from operations
point number one rule number one you
know this is this is the most important
thing the company has to produce money
operationally if it is unable to produce
money operationally then there's
something wrong with the business model
of the company you know there there is
some lack of planning or efficiency or
you know maybe the product itself is not
very good so always double check whether
the company is producing cash
operationally right so yeah I'll leave
it at this I think hopefully that serves
as a quick introduction to cash flow of
course if you go through this module
we've got you know a ton of content with
examples and all that stuff so I would
strongly suggest that you go through
this chapter you know whenever possible
right so yeah so now what what I plan to
do is you know later I've lined up some
cash flow statements of few companies
here right let me just zoom this in I've
lined up the cash flow statements of few
companies you know five six companies
and I've got it from 2007 all the way up
to the last financial year that is 2016
right so this is roughly nine years
worth of data so my objective for today
is is this you know so just by looking
at for example this is the cash flow
statement off GP Associates now just by
looking at these numbers I want to take
a certain I want to develop certain
insights which will help me decide
whether the stock is worth investing or
not right so that's that's exactly what
I want to do and you know and convey
through this webinar hopefully this is
big enough and you can see the numbers
anyway and so let's get started
we've got JP associates as one of the
companies here ok JP associates a fee an
old-time market guy like me you would
probably understand you would probably
you know know the kind of crazy
JP associates hand you know everybody
wanted to trade JP associate everybody
wanted to own JP associates in their
portfolio right from a small retail guy
to
big fund manager right so it was a
market darling right but but look at JP
associates today so I've loaded it on my
portfolio it's trading at 13 bucks I
think it went all the way lower or if
I'm not wrong eight or nine rupees some
time last year it's back to 13 rupees
but still I would consider this a penny
stock right so that's JP associates what
is it that happened in JP Associates and
why did the stock collapse like that and
would cashflow give us some sort of
insight right that's the big question
now let's look at the cash flow from
operations operationally the company has
been generating decent amount of money
all through this years for example 2007
it generated close to about thousand one
hundred cross two thousand eight it
generated about nine hundred cross two
thousand nine about seven hundred crores
2010 it took a beating but looks like
they bounced back in 2011 so on and so
forth right so 2016 it looks fantastic
nearly six and a half thousand crores of
cash has been generated through
operations for 2016 alone on the face of
it it looks fantastic let's sum up all
the cash flows the historical cash flows
so over the last all these numbers are
in repeat crores so which means to say
JP Associates over the last nine years
generated nearly 28,000 787 CROs I mean
that's that's a large amount of money
and it looks fantastic right great
now what did JP Associates do with so
much money right so it generated so much
money now what did it exactly do with it
let's look at the investing activity the
investing activity the first thing that
occurs to me is it's negative throughout
which means to say investing activities
consuming money in other words the
company is investing in itself maybe
because it sees a brighter prospect
right so let's it's been continuously
investing in itself except for 2016
because 2016 it's a
it've number let's look at what that
means in a short while so let me sum up
you know the investing part let's see
how much they've invested look at this
JP associates has invested close to
sixty six thousand crores in itself
right
I have taken a net sum here now all you
have to do is you not think about it
this way it has generated 28,000 crores
in cash but it has invested close to
double of what it has earned in various
sorts of projects and assets where did
they get the money from
I mean nearly double right so where did
they really get the money from so let's
see what the financing activity reveals
first and foremost financing activity if
you notice is positive throughout right
almost way or till up to 2015 it's
through it's a positive number which
means to say they continuously borrowed
money they borrowed to the extent of
37,000 cross so all this money and a
large portion of this money that is
money from operations has gone in to
investing activity right so they've
invested helter-skelter and in the whole
process they've taken on a huge amount
of debt nearly 37,000 crores of debt now
here's a question for you right now if
they have taken thirty seven thousand to
75 crores of debt even assuming a modest
ten percent interest rate of interest
rate on this debt we are talking about a
yearly interest payment of three
thousand seven twenty seven cross think
about it operationally the company is
generating see first of all this is
pretty volatile right for three and six
thousand anyway and operationally
they're generating positive cash flow
but half of it is going out to repay
banks and debt holders right half of it
is going out as just interest repayment
I'm not even talking about the principal
repayment here right now if if that is
going out to debt holders
they also need to run their operations
and you know where what will the
investors get what will the investors
get they won't get anything right there
won't be any returns there is no case
for investment here another crucial
point assume that they managed to repay
interest from operations
how will they free pay back the
principal or on what basis will they
repay back the principal right companies
in this situation more often than not
resort to clearing their principal by
selling off assets which is exactly what
has happened in 2016 if you see the
number here is positive which means to
say that they're trying to sell their
assets to clear off this debt right now
if a company continuously starts
liquidating its assets then you know it
will obviously take a beating on its
operations and it will obviously take a
beating on the operating income and it
has a trickle-down effect and finally
investors are left with nothing right so
this is a clear warning sign with I want
you to appreciate that you know we've
not looked at any chart any balance
sheet or PNL we just looked at these
three lines and we were to a we were
able to generate a lot of insight and
based on this alone if you were to ask
me would you invest in JP si JP
associates definitely not right the
company is clearly sitting on a time
bomb okay so that's with JP associates
right so we will proceed to the next
company we've got IVRCL IVRCL as you may
recognize is another infrastructure play
right so let's look at the cash flow
from operations again starting from 2007
2007 close to about to 12 crores
2008 - 670 crores which means to say
they've lost money operationally 2009
them again lost money but not as bad as
2008 2010
- 54 again they've lost money but again
not so bad as 2009 big spurt in 2011 on
maybe they bounced back right so pretty
volatile numbers of if personally when
I'm looking at cash flow from operations
when I whenever I see volatile operating
activity numbers it kind of puts me off
I don't even know you know it's not a
very good thing one of the mean you know
things that I look for when investing in
companies is that operationally the cash
flow should be stable or you know it
should it should be trending either
upwards or downwards some sort of trend
should be their volatile numbers like
this is a big no-no for me anyway
so let's sum up all their cash flows
let's see how much money they have
generated through operations over the
years right so they seem to have
generated okay so not generated they
lost money they've lost close to about
one hundred and seventy eight cross over
the last nine years this to me is a big
disaster right so over the last nine
years operationally the company has lost
178 cross right oh bad but let's see
what they're doing in terms of investing
activity they're bad operations then
deter them looks like you know the first
of all the numbers are all negative
throughout even 2016 so which means to
say they're bad operations then stop
them from investing they're investing
further into their business they've
invested large very large amounts of
money all throughout the years let's see
how much money they've invested ah look
at that
they have invested close to about seven
thousand eight hundred and forty-eight
cross right so they've invested pretty
large amounts of money now there is no
way that this could have come from their
operations the investment could have you
know come in from their operations very
clearly it says that they have borrowed
lot
money let's see to what extent so if the
borrowed that means to say the cash flow
from financing activity has to be
positive which it is right so all
through the years they've borrowed money
maybe without any discretion right so
let's just put this number so that that
reveals the entire story so nearly I can
run this off to a thousand cross I can
run this after eight thousand cross so
eight thousand crores of investment has
been completely you know funded by
borrowings from banks and debt holders
or bonds or whatever but they've
borrowed money to invest in their in way
to invest in their own business
operationally they are not capable of
generating that kind of money this is a
clear sign of a leveraged balance sheet
if a balance sheet we say a balance
sheet is leveraged when there is too
much debt on the balance sheet now this
is a classic example now again let's do
the same rule if they were to if they've
taken this money even at a modest ten
percent interest rate we are talking
about eight hundred and twelve cross off
interest repayment every year but
operationally they are just generating
about one hundred and eight cross
clearly not a good sign so if you were
to guess what is going to happen to this
company or place let's say one or two
years they will eventually have to repay
this large principal amount which is
eight thousand one twenty eight cross
operationally I don't think so they will
bounce back to an extent where they can
repay this loan
they'll have to restructure their loans
or they will be forced to sell all the
assets they have piled up over the years
this company my point is they will
liquidate assets right they will
liquidate assets and they will repay
back their loans right now this is a
situation a company should not really be
in and you as an investor should not be
investing in such companies right so
let's look at
[Music]
the stock price here is IVRCL infra for
you five bucks penny stock right not
worth investing in so again you know I
want you to appreciate that we've not
looked at anything else we've just
looked at just three lines of
information right and it's revealing a
whole lot of details for us this is
exactly why I love cash flows just three
lines you need not have to look at
anything else just three lines of
information gives you a ton of insights
now for example if a company is
producing cash flow from operations
consistently you know over the years it
not only tells that the company's
products are selling you know
operationally it is profitable it also
tells us that you know the management is
efficient right so there are a lot of
information that you can extract from
just three lines of information right so
now would you be investing in this
company please don't I wouldn't and I
would advise you also not to write
so--that's IVRCL for you I've got
another company here called South Indian
paper mills now this is a small little
company situated here in Karnataka in a
place for an unguent good so what does
South Indian paper mills do for they are
in the you know business of
manufacturing paper products the
manufacturer you know the corrugated box
that that's usually associated with you
know your Flipkart or amazon delivery
then such kind of boxes these guys
manufacture in large capacity right so
let's look at their I've obviously
picked this for a certain reason I will
tell you that very shortly
all right so operations wise starting
from 2007 they've been generating lemon
cross loving cross 6 gross sounding
cause okay so if I were to make a quick
you know estimate here first of all the
cash flow from operations
all the way up to 2014-15 has been
positive which means to say they're
generating cash operationally and
they're generating small amounts of cash
right so that's important to note here
they're generating small amounts of cash
small amount is not a problem as long as
it's you know positive and as long as
it's sure displaying certain amount of
trend right but 2016 the cashflow nearly
doubled right so that's a number to
revisit we will reuse it so the cash
flow suddenly doubled which is pretty
interesting let's see what they're doing
with the cash that they've generated
right are they investing yes they have
been investing all throughout and looks
like they're investing sums smaller than
what they've earned so if they have
earned 11 and a half crores here they've
invested about 5 crores in their
business right and it looks like a
recurring pattern here they're
continuously investing in their business
maybe expanding the capacity or
improvising on their manufacturing
technology or whatever but the point
here to notice they are investing a sum
which is smaller than what they're
generating now this is this to me gives
me some sort of you know helps we
develop some sort of opinion on the
management style maybe they are pretty
conservative in their approach which is
not a bad thing right in fact it's a
very good thing for an equity investor
right now and are they look at the
financing activity of this is this
according to me as a beauty right so
they the operation operating activity a
sorry financing activity is continuously
negative barring 2009 right so which
means to say that they want to repay
that back their debt right so from
whatever money they're earning a part of
it is going towards investing in assets
investing in themselves and a part of it
is going towards repaying their debt a
brilliant combination if you were to ask
me right but let's just focus on 2016
yeah so all through if I were to make a
single line judgment here I would say
the management is extremely conservative
and prudent with their financial
management
but 2016 cash flow from operations
doubled right why would it have doubled
maybe the business prospects have
improved right and the management
suddenly has invested a pretty large
amount large in with respect to their
historical investments they've invested
nearly 44 crores of money in terms of I
don't know what sort of investments they
would have made but if I were to guess
maybe plant and machinery expanding
their capex and you know upgrading their
technology or whatever but the point
here to notice they've invested large
amounts of money and they've even gone
out and borrowed a pretty large sum here
12 crores which is positive tells me
that they have borrowed a large sum
right so let me just quickly sum up
their cash flows right so they've
borrowed large amounts of money now
think think about it why would this
company do this all throughout last 8
years they've been very conservative by
2016 they looks like there is a pretty
aggressive stance from the management
now I would look at it as a turn around
sorry what happened I would look at this
as a turnaround situation maybe maybe
there's a turnaround situation here
maybe the business prospects is
improving me and that's the reason why
the management has gone ahead and
invested a large sum they've even gone
ahead and taken out debt now debt in
this background is very good to me right
so this gives me a very comfortable
feeling this would give this tells me
that you know this company has something
going on and I should be and I this
would trigger my you know
inquisitiveness and I would dig further
into the annual report and you know look
at what they're talking about the
business look at the balance sheet look
at the PNL this would lead me to take
further action while at the same time
these two stocks would not lead me to
take further actions straight away just
by looking at these two these three
lines ib r CL and JP associates i would
run away from them but south indian
miles south indian paper mill looks like
there's a turnaround situation and i
would be interested in exploring the
stock further right so that's with south
indian paper mills right how right so
let's move to the next stock TCS fairly
large company right so let's look at the
cash flows here alright so look at the
cash flows from operating activity
positive numbers all throughout right
2007 they invested they generated close
to about three and a half thousand
crores similar numbers in 2008 and now
this is if you if you ask me this these
are beautiful set of numbers right so
first and foremost the numbers are
trending so every year the company is
generating positively positive cash flow
there if the numbers are also increasing
here on your right so if I were to
quickly calculate the CAGR of cash flow
from operations so that would be let me
just do that you know so this divided by
this closed brackets raised to the power
1 by 9 minus 1 right so 21 percent so
the company is generating money
operationally at the rate of 21 percent
year on year these are beautiful set of
numbers right and let's see how much
money they've generated you know over
the years right look at that
ninety-eight thousand seven hundred and
ninety five cross now for no reason you
know I mean probably this is the reason
why TCS is one of the most valuable
company in India in terms of market cap
you know the law company is I think if
I'm not wrong worth close to about five
lakh crore right so yeah and
probably this is one of the reason why
it commands such a beautiful premium
right so the company is generating
positive cash flow and it is also
generate and it is also growing its
crash flow at a very very healthy person
see here now what have they done with so
much money I mean that's large amount of
money right so what have they done have
they invested in themselves looks like
so 2007 they invested thousand eight
hundred crores which is roughly half of
what they aren't how that has been
deployed and you know in in their own
business now TCS is an IT company right
so what what sort of investments can
they do
they'll need IT infrastructure obviously
they'll need an office space they will
need you know maybe some telecom
equipment and stuff like that uh but
it's not a very you know capex heavy
business right so but and this is
exactly what the investing activity
numbers revealed to me initially they
invested you know close to ha o the
initial years they invested close to
half what they earned in themselves but
over the years that investing number has
come down right so they've they've
invested lesser and lesser amounts of
money
in their own business right so maybe
another way to look at it as whatever
they invested earlier on in the business
is kind of paying out dividends now
right so how much have they invested
overall they've invested close about
forty thousand crores right they've
invested closed about forty thousand
crores in their own business now out of
the 1 lakh Road that they've generated
forty thousand crores has been invested
now what happened to the balance money
which is roughly sixty thousand cross
right so we'll investigate that now let
us look at the cash flow from financing
activity cash flow from financing
activity the first thing that strikes to
me is the numbers are negative
throughout right then it's a negative
cash flow from financing activity
usually when I look at a negative number
the what comes to my mind is maybe the
company is
repaying its dead now TCS being an IT
company it's a well-known fact that they
don't have most of the IT companies
don't have debt on their balance sheet
if they do not have debt on their
balance sheet
what are they repaying right so
continuously the numbers are negative
which means cash is going out that means
that they must be repaying something but
they do not have debt right now this is
a case where the company is paying out
dividends right so whatever excess cash
is there they're paying that out as
dividends there is no debt cashflow is
negative because there is a dividend
payout how much dividend have they paid
out there you go roughly about 52,000
crores of dividends TCS has distributed
over the last nine years which to me
again as fantastic now here's the thing
with when you're managing the finances
at a company level right so all the
money that you earn you you either need
to invest it back in your business if
you are unable to invest it if you only
if you're in a pool if you are not able
to identify you know situations where
you can invest that money profitably
back in your business you're better off
giving that money to your investors as
dividends which is exactly what TCS has
done they've invested part of their
money in their own business and a bulk
of the money has been given out as
dividends this is this is this is this
according to me is a brilliant you know
corporate governance brilliant
management take and this is exactly what
the cash flow from cash flow statements
of TCS is revealing so this word if I
were to invest just based on cash flow I
would go ahead and invest right but of
course there's a lot of other things
happening with TCS you know there's been
a management change and you know you
need to study you need to understand how
the IT business works and then take a
call on whether to invest or not but
just the cash flow numbers they are
beautiful if you were to ask me right
let's look at the last company we've got
Infosys here right so let's do the same
drill let's look at the the cash flow
from operations throughout again you
know they've grown cash flows
beautifully 2007 they were at 3500 odd
cross 2016 that at close to about nine
thousand dot cross let's look at the CAG
our what what rate have they grown their
cash flow from operations let's see if
it actually matches up to UM ECS right
what did i okay
not as much as TCS but nevertheless of
you know twelve percent growing your
cash flow is not a you know not a bad
thing so but of course Theseus was
growing it at close to over twenty one
percent these guys are growing it at a
12-person not bad I would still be happy
with such kind of growth especially
given the fact that enforces is a very
very large company right so positive
numbers throughout highly profitable
operations let's see how much money
they've made right so they've made close
to about obviously not as much as TCS
but yes now they've made about sixty
five thousand crores in operations over
the last nine years right which is
fantastic but this is not the point with
the Infosys we need to find out what
they're doing with this money are they
investing in themselves yes they are
investing but not much they are not
investing much here right so they've not
as much as TCS let's sum up their
overall investments around the same year
while TCS invested thirty nine cross
Infosys just invested eight thousand
cross with in their own business right
so out of 65,000 cross eight thousand
cross is giving uh is being invested in
their own business what are they doing
with the balance money right look at the
financing activity or not impressive at
all obviously no debt here so this is
dividend payout but look at the amount
of dividend Infosys has given out right
so let's see how much dividend they've
given out just twenty nine thirty
thousand crores I'll round this actually
I can't round this to thirty let's say
twenty nine thousand cross hey tha's out
of the sixty five thousand cross eight
thousand is being invested with
themselves twenty nine thousand crores
has been invested the sorry not invested
distributed as dividends whereas the
balance money sitting and and what is
Infosys trying to do with his numbers
with this sorry with this money right so
that's the kind of question you need to
be asking so I looked up the Infosys
annual report and I looked at the cash
flows the cash statement and here is
where the balance money is sitting right
nearly 32,000 cross as of 2016 is
sitting in deposits and financial
institutions right so this is an extract
from the balance sheet as from the
annual report and it clearly states that
in sorry in current account in deposit
accounts 27,000 crores which is which is
the balance money roughly the balance
money here that is sitting in a bank
now here's my not just mine but all
Infosys investors have this crib which
the company if you are unable to invest
in yourself right in your own business
and you ideally you should be giving out
that money as dividends now Infosys is
neither investing in businesses nor is
it giving out dividends it's been
holding cash right now that's that's not
acceptable and if you see there's been
lot of there have been lot of open
letters written by likes of Mon the spy
and man the Nelkin en you know all those
tall words saying that you know they are
not managing their cash well they need
to give out dividends right investors
are better off utilizing that money so
but that's not happening so yes so
that's about it if if I were to take a
you know call on investing in TCS versus
Infosys just based on this assessment my
bet would be on TCS right just on this
this this
duration but of course as I mentioned
earlier there are you know lots of other
things that you need to look at you know
when you make trying to make a decision
on whether to buy a stock or not cash
flow is a great starting point in fact
this is how I always look at my
investment decisions the first thing
that I always do is look at what's
happening in the cash flow if you are
aware there is a balance sheet there is
a P&L and then there is cash flow these
three call statements together form the
financial statements of a company from
my perspective cash flow is the most
sacred it gives you the real picture of
how the company is managing its cash as
the cash and it also tells you a great
deal about the management style whether
it's conservative we looked at the this
company here just these numbers tells me
a lot about the the way the company is
managing you know their day-to-day
activity and whether the company is
conservative or not so yeah so that's
about it guys so I hope you found this
webinar interesting you know please do
take cues from this and follow up by
reading up the content on varsity we've
got great deal of stuff going on here
right so the entire the fundamental
analysis is documented here with an
example eventually what you need to be
doing is trying to find out the
valuation of a company by doing a
discounted cash flow analysis we've
taken up an example here and
demonstrated how you can do a two-stage
DCF so yeah so good luck guys happy
investing and thanks for thanks again
for taking our time and attending this
webinar so yeah see you again soon