TION FOUR HFLOW KWIRAIL HOLDINGS LTD Statement of Cash Flows 2016 Sm 2015 Sm Cas
ID: 2393991 • Letter: T
Question
TION FOUR HFLOW KWIRAIL HOLDINGS LTD Statement of Cash Flows 2016 Sm 2015 Sm Cash flows from Operating activities Receipts from customers Interest received Payments to suppliers and employees Interest expense 698.9 726.6 3.4 -609.8 642.7 15.5 71.8 2.9 13.7 78.3 Net operating cash Cash flows from Investing activities Sales of property, plant and equipment (PPE) Capital grants from the Crown Purchase of PPE Purchase of intangibles 4.5 44.6 285.2 280.5 13.2 244.6 3.5 32.9 Net investing cash 254 Cash flows from financing activities Crown capital investment Increase in equity from NZRC land sales Loans Repayments of borrowings etc 209.8 18.1 24.6 9.6 198 13.4 1.6 5.6 Net financing cash inflows 222.9 207.4 34.6 15.4 50 Net increase in cash this period Cash at the beginning of the year Cash at the end of the year 46.5 50 96.5 Other information: current liabilities (Sm) total liabilities ($m) 2016 2015 2014 172.4 186.8 178. 4411 4282 434.2 (a) Overall, what is your assessment of the information provided from a cash flow statement, i.e. what does this statement tell you about the 2016 cash flows? (5 marks) (b) What is the Current Cash Debt coverage and Cash Debt coverage ratios? 5 marks) (c) What do you understand by these ratios as indicators of the management of cash from the point of view of those who loan cash to the company? (5 marks)Explanation / Answer
a)The casflow statement of 2016 reports the cash generated and used during 2016.The cash flow statement organises and reports the cash generated and used in the following categories:
1.Operating Activities:A healthy business should generate positive net cash flows from operating activities and should grow the amount overtime. In the question above the operating activities cash flow of 2016 is positive and it is more than that of 2015 which signifies that the business is growing.
2.Investing Activities: A stable or growing business typically has negative net cashflow from investment activities, which occurs when it buys more assets than it sells.In 2016 net investing activities is negative which signifies that the business is stable or growing.
3.Financing Activities:A healthy business may ocassionally show positive net cash flow from financing activities as it raises money from investors and creditors to grow it's business but a healthy business show more often negative cashflow from financing activities.Negative amount suggests that business is using it's cashflows from operating activities to pay dividends and pay off it's outside financing.In 2016 the positive value shows that the business ability to pay it's debt is not up to the mark.
b) Current cash debt coverage ratio
Net cash provided by operating activities /Average current liabilities
Average current liabilities=(opening liabilities+closing liabilities)/2
78.3/(172.4+186.8)/2=0.44
A high current cash debt coverage ratio indicates a better liquidity position.Here Company does not have good liquidity condition. A ratio of 1:1 is considered comfortable as 1:1 ratio means the business is able to pay all of it's current liabilities from the casflow of it's own operations.
Cash Debt Coverage ratio
Net cash provided by operating activities/Average total liabilities (current plus long term liabilities
78.3/(441.1+428.2)/2=0.18
In general a high level of this ratio is considered to be favourable.Cash debt coverage ratio of 1 is considered to be reasonably good indicators of the company's financial stability. In this case this ratio is also not up to the mark.
c) Current cash debt coverage ratio: It indicates the ability of the business to pay its current liabilities from its operations. In the question above company is not generating enough cashflow to pay off its short term debt. A ratio of less than 1 might be problematic.
Cash debt coverage ratio: It shows how much the company's total liabilities can be covered(paid) with net cash from operating activities.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.