The comparative cash flow statements from Sears and Wal-Mart are presented above
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Question
The comparative cash flow statements from Sears and Wal-Mart are presented above. Amounts presented are in millions. Review both statements considering what you've learned in this chapter about the cash flow statement. Answer the following questions: 1. When analyzing a company's cash flow statement, which section of the statement (operating, investing or financing) do you believe is the best predictor of a company's future profitability? Why? 2. Which company do you believe is healthier based on the cash flow statements presented? Provide at least two specific examples from the statements. Source: Wendy Tietz, PhD, CPA, CMA, Accounti under a Creative Commons Attribution-NonCommercial 3.0 Unported License. nginthe Headlines.com This work is licensedExplanation / Answer
1. When analyzing a company’s cash flow statement, the section that is the best predictor of a company’s future profitability is the “operating activities” section.
This is because cash flow from operations is the primary source of cash generation for a company. It is based on the internal profit generating ability (as based on net income) of a company. We know that cash flow from operations is computed by adjusting net income for non cash charges and working capital changes. Thus the best predictor of a company’s future profitability is the “operating activities” section.
2. After analyzing the cash flow statements of Sears and Wal-Mart I can conclude that Wal-Mart is the healthier company between the two.
Two specific examples: Sears has not generating a positive cash flow from operations in all the three years of 2014 to 2016. On the other hand Wal-Mart is generating cash from its operations. Thus as Sears has a cash outflow with regards to its operating activities it does not have internal profit generating ability. Wal-Mart on the other hand has internal profit generating ability.
The 2nd example is with regards to free cash flow (FCF). FCF = cash flow from operations – capital expenditure. An analysis of the 2 companies is provided below:
Wal-Mart is generating positive FCF regulary while Sears has a negative FCF.
SEARS 2016 2015 2014 Net cash from operations (2,167.00) (1,387.00) (1,109.00) less: purchase of PPE 211.00 270.00 329.00 Free cash flow (2,378.00) (1,657.00) (1,438.00) WAL-MART 2016 2015 2014 Net cash from operations 27,389.00 28,564.00 23,257.00 less: purchase of PPE 11,477.00 12,174.00 13,115.00 Free cash flow 15,912.00 16,390.00 10,142.00