Cash flow and self-financing capacity

The simplified calculation

Cash flow = result for the year (9904) + depreciation, write-downs and provisions (630 + 631/4 + 635/8)

This is the version that can always be computed from a filing, abridged included: in the abridged and micro formats, 630 does not appear separately but the charges are found in the notes (8079, 8279) and 631/4 and 635/8 appear in the income statement. FinScan uses this version.

The National Bank's definition

The Central Balance Sheet Office applies a more complete definition, which it uses in its ratio no. 10 (cash flow divided by equity). For the full format, cash flow is obtained as follows:

Operation	Headings
Profit (loss) for the year	+ 9904
Depreciation, write-down and provision charges, operating, financial and non-recurring	+ 630 + 631/4 + 635/8 + 651 + 6501 + 6560 − 6561 + 660 + 661 + 662
Reversals of depreciation, write-downs and provisions	− 760 − 761 − 762
Losses on disposal of fixed assets	+ 663
Transfers from deferred taxes	− 780
Transfers to deferred taxes	+ 680

For the abridged and micro formats, the NBB uses the available headings: + 9904 + 631/4 + 635/8 + 8079 + 8279 + 8475 − 8089 − 8289 − 8485 − 780 + 680.

The idea is the same as in the simplified version, taken all the way: every charge and every income that did not give rise to a cash movement during the year is neutralised.

What it says

Cash flow measures the company's capacity to finance by itself:

• the repayment of its debts;
• its investments for replacement or growth;
• the remuneration of the shareholders.

A company whose cash flow is lastingly negative consumes its cash or has to borrow to operate.

Repayment capacity

This is the use the IBR-IRE makes of it in the chapter devoted to solvency, with two ratios:

Coverage of third-party funds by cash flow = cash flow ÷ (16 + 17 + 42/48 + 492/3)

Coverage of long-term third-party funds by cash flow = cash flow ÷ (16 + 17)

The first says what share of total debt one year of business could repay; the second focuses on long debts. Their inverse gives the number of years of cash flow needed to repay. In the example handled by the IBR-IRE, a company covered 8.1% of its third-party funds and 38.6% of its long-term third-party funds with its annual cash flow; the study stresses that sector ratios are missing for this ratio and that it is therefore read mainly over time.

The situations to recognise

• Positive profit, positive cash flow: the normal case.
• Accounting loss, positive cash flow: heavy depreciation explains the loss; the business still generates cash. Frequent after a large investment.
• Positive profit, weak cash flow: rare; often a reversal of a provision or write-down, which is income without collection.
• Negative cash flow: the business consumes cash. Look at how many months of cash remain and how the working capital requirement evolves.

Cash flow and return on equity

The NBB also divides cash flow by equity (ratio no. 10, next to ratio no. 9 which divides the net result by equity). The gap between the two ratios measures the weight of non-cash charges: a heavily depreciated industrial company will have a ratio 10 well above its ratio 9; a service company, two close ratios.

Monthly figures for comparison

FinScan also shows monthly cash flow (cash flow ÷ 12): compared with cash and amounts payable within one year, it says in how many months the business rebuilds the till. This is a FinScan presentation, not an NBB ratio.