Friday, December 31, 2010

MicroCaps.info: Analysis of The Statement of Cash Flows

The analysis of a company's statement of cash flows can tell you how and when the company acquires cash. The following ratios will help you to better understand what a company is doing with its money. The following ratio are only a few of many ratios in the analysis world, after reading this, search the Internet to learn others.

  • Current Cash Debt Coverage Ratio=(net cash provided by operating activities)/(average current liabilities). A cash-basis ratio that accounts for the changing liabilities and cash flows that a company experiences during the course of a time period. Current cash debt coverage ratio is a measure of liquidity. Unlike the acid-test ratio or current_ratio, the current cash coverage ratio does not look at year-end balances. Instead, the ratio is calculated by taking the net cash provided by operating activities and dividing it by the average current liabilities. The current cash debt coverage ratio is one example of a cash-basis ratio. Essentially, the ratio provides a means of identifying the current rate of cash flow while making allowances for the shift in liabilities from one portion of the period to the next. Evaluating the cash flows and their sources, along with calculating the average current liabilities for the period cited, helps to identify any potential problems in the flow of operating capital before the issue has a chance to escalate.
  • Cash Return on Sales=(net cash provided by operating activities(net income)/(net sales). This measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. Cash return on sales is also known as a firms operating profit margin
  • Cash Debt Coverage Ratio=(net cash provided by operating activities)/(average total liabilities). A cash-basis ratio used to evaluate solvency.

  • To illustrate, I have chosen two companies in the category: Personal & Household Products. All numbers are as of market close December 28, 2010.


    NASDAQ:PARL
    Parlux Fragrances, Inc.
    Quote: 2.83
    Market Cap: 57.99M
    Annual Revenue: 148.10
    Annual Net Income: -14.76
    Net Cash Provided by Operating Activities (000)
    2010 $13,882
    2009 $(13,057)
    2008 $34,210
    Current Liabilities (000)
    2010 $14,532
    2009 $26,220
    2008 $15,040
    Total Liabilities
    2009 $14,532
    2008 $26,220
    2007 $15,582
    Net Sales (Net Income)
    2010 ($14,759)
    2009 ($4,284)
    2008 $5,036

    NASDAQ:FACE
    Physicians Formula Holdings, Inc.
    Quote: 3.88
    Market Cap: 52.73M
    Annual Revenue: 77.80
    Annual Net Income: -3.90
    Net Cash Provided by Operating Activities (000)
    2009 $9,390
    2008 $12,446
    2007 $1,229
    Current Liabilities (000)
    2009 $38,701
    2008 $50,038
    2007 $46,867
    Total Liabilities
    2009 $57,910
    2008 $62,535
    2007 $79,017
    Net Sales (Net Income)
    2009 ($3,903)
    2008 ($19,769)
    2007 $8,749

    (source for all numbers are Yahoo Finance & Google Finance)
    For the first company, PARL, The Current Cash Debt Coverage Ratio(net cash provided by operating activities)/(average current liabilities)for 2010 is

    $13,882/ ((14,532+26,220+15,040)/3)=13,882/18,597.33=0.75
    and for 2009 it was
    $(13,057)/((26,220+15,040)/2)=(13,057)/20,630=(0.63)
    This means in 2010 the company had 75 cents in revenue from operating for every $1 of debt due within a year.

    For the second company, FACE, The Cash Return on Sales(net cash provided by operating activities(net income)/(net sales) for 2009 is

    $9,390/($3,903)=(2.41)

    And for the second company again, FACE, The Cash Debt Coverage Ratio(net cash provided by operating activities)/(average total liabilities)in 2009 is

    $9,390/(($57,910+$62,535+$79,017)/3)=9,390/66,487.33=0.14

    As always, micro cap or penny stock investing is risky. We here at Microcaps.info always advise that you do your own homework and never rely on a blog, tv news information, or a major banks' analyst, but instead gather all the data from the latter, and continue to do due diligence, and what you thought once was a good deal you may see that it is a waste of time and money. And the same follows that you will find investments that will reap rewards long into the future. Next Friday we analyze companies that will be at The Micro cap Conference in New York, on Jan 10, 2011.

    Safe and Smart Investing,

    -Nicholas Gabriel

    Ps Remember to always research the management of a company i.e. their CEO, CFO, and Board of Directors.

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