From Hasbro’s cash flow statement –
You will note that even though the company is showing negative net earning in 2000 – after the provisions are taken into account the net cash provided from operating activities is $162,556. The Cash flow from operation has gone down in the year 2000 has done down drastically as compared to 1999. However, the company seems to have improved in its collection policy which can be seen in a huge decrease in AR. The company has also been prompt in paying its accounts payable. Hence, the company is operating efficiently in the short term.
In fact comparing with year 1998, the company has improved its performance/operating cash flow. It is important to evaluate the reason of an abnormal change in 1999 before comparing the results of 2000 to the year 1999.
Company has over the period increased it long term liabilities as evident from the financing cash flow and increase in interest payment. It is funding its projects and paying off the short term debt with an increase in the long term debt and funds generated from the operating activities. It seems like the company is trying to take advantage of leverage to maximize return for the stockholders as the company is buying back its stock and funding the financial needs by long term debt. Also, the company has been paying steady dividend to the stockholder.
The Company has positive cash flow from operations and the cash paid for interest is $91,180 in the year 2000 which is appx. 56% of the cash flow from operations. The operating cash flow to Interest ratio is greater than 1 and hence the company can reasonably meet its short term obligation. This is one of the criteria based on which creditors would be comfortable lending to the Company.
Please note that in order to do a comprehensive evaluation- in addition to cash flow, Balance sheet and P&L should also be reviewed and evaluated along with other material information that may affect the company in future.
Operating Cash Flow-
Operating Cash flow reflects the ability of a company to generate cash from its operations. Hence, it can be used to determine the company’s ability to meet its short term and long term obligation. Several ratios can be used to do such an evaluation. For eg.
The operating cash flow ratio (OCF) measures a company's ability to generate the resources required to meet its current liabilities. It can be calculated as Cash flow from operations / Current liabilities.
Operating Cash Flow can also be used to measure the company’s ability to repay its current debt and to measure the cash dividend coverage as well.
It basically measures the operating efficiency of a company and the ability to generate cash for the needs of the business.
External & Internal Sources.
External sources of cash would be mainly from short term and long term borrowings and additional stock issue. Internal Sources of cash would be the cash generated from operations and ploughed back into the operations (which are not given out as dividends). While External source of funds may have strings attached such as norms, conditions etc such is not the case with internal source of funds.