Page 109 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

NOTE: Be careful when making the cash interest and tax READING 19: INTEGRATION OF FINANCIAL STATEMENT ANALYSIS TECHNIQUES
adjustment to operating cash flow. Firms that follow IFRS have
the choice of reporting cash paid for interest as an operating
cash flow or as a financing cash flow. If a firm reports the MODULE 19.5: EARNINGS QUALITY AND CASH FLOW ANALYSIS
interest as a financing cash flow, no interest adjustment is
necessary.
The cash return on total assets has increased over the period, which
seems to justify the recent acquisitions. However, since the results of
As shown in Figure 19.16, we can calculate the ratio of cash generated the accruals ratios, calculated in Figure 19.15, gave us cause for
from operations to operating income.
concern, we need to calculate cash flow to reinvestment, cash flow to
total debt, and cash flow interest coverage ratios.

The ratio of CGO to operating income confirms that cash generated from
operations has exceeded operating income over the past three years. The
results of this analysis reduce our earlier concerns of potential earnings
manipulation from our accruals analysis.
In order to evaluate Thunderbird’s recent acquisitions, we examine the
cash return on total assets.

All three cash flow measures presented in Figure 19.18 are reassuring. Although cash
flow to reinvestment declined slightly over the period, cash flow still covered capital
expenditures by 3.6 times in 2016. This indicates there are sufficient resources to fund
Thunderbird’s ongoing capital expenditures.

Cash flow to total debt of 56.4% in 2016 confirms Thunderbird’s relatively low leverage.
Cash flow interest coverage (the interest coverage ratio calculated on a cash-flow basis)
has been declining over the past three years but, for 2016, cash flow still covered
interest paid 21.9 times, which is excellent. With low leverage and high interest
coverage, Thunderbird has the flexibility to increase its debt if the need arises.