Tuesday, August 15, 2006

Financing cash flow or CFF

Financing cash flow (or CFF) is usually the last instalment in this trilogy within the trilogy (phew!) i.e. that last portion of the cash flow statement and it deals with the financing needs (both equity and debt) of the company. This would usually involve repayment of debt, or increase in borrowing, dividend payment, equity capital reduction, increase in equity, share buyback etc.

Ok, ok, this may be too heavy, let's go back to Finance 101. A firm needs capital to run its business. There are two ways to get capital,

1) you borrow from bank, this is call debt
2) you raise money from the stock market, this is call equity

Financing cashflow deals with what the firm does with its capital. Increase debt? Decrease debt? Increase equity? Reduce equity? Pay dividend? Or outright equity reduction etc.

Hence, it would be useful to observe how the company is changing its capital structure from this part of the statement. Just like it would be useful to see if your spouse finance her spending needs through debt or something else (most likely through you though), and since buying a company entails as much commitment as sleeping with someone for the rest of your life, it pays to know.

In Singapore, a lot of companies are trying to reduce its equity base (SPH, Singpost etc) in order to make some financial ratios (like ROE) look good. (i.e. some spouse is trying to fake financial stability here) However that is just part of the story, the other part is *drumrolls* to return money back to their No.1 shareholder: Temasek Holdings. Of course, minority shareholders will stand to benefit as well, hence while it last, it would not be a bad idea to invest in these stocks.


  1. hi

    u mentioned abt ROE, 3 china companies :

    CG Tech ROE - 37%
    HongWei ROE - 43%
    China Sky - 39%

    why is Hongwei share px below of their peers ?

  2. Share prices are a reflection of future earnings discounted by a rate of return.

    Investors may feel that Hongwei's future earnings are less certain(i.e. riskier) and therefore discount their earnings by a larger required rate of return.

    Alternatively, If Hongwei's ROE is 47% which is higher than everybody else, what are they doing to make their ROE higher? If Risk is proportional to Return, are they taking on more risk to deliver their 47% RoE? What are the company doing to deliver higher Net Profit After Tax per dollar of Equity? Could it be that their Equity base is smaller and therefore their RoE ratio is larger?

    Therefore, Hongwei's share price are lower in comparison to her peers in the same risk class because of risk premium discounting effect.

    If you follow J-chan's value investment idea, gotta check Hongwei's Price-to-Cash Flow ratio.(Ask urself, how much am I paying for a dollars worth of cash generated by this company?) See if you're getting a bargain after comparisons made agst her peers.

    Good Luck!

  3. HI

    anywhere i can check out J-chan idea ?


  4. Thanks, Mr Hardy for the informative answer. Just to add, there are 1,001 things that can affect stock price. But in the long run (5-10yr), it is earnings that counts.

    Value investing is a style of investing that require patience, endurance and hardwork.

    Start with the few basic posts and slowly you will get the idea.