1_cash.jpg

Earning season is going on and everyone in the office is looking very closely to companies quarterly results.

Today I would like to discuss interesting topic which many investors forget to look at, it is called cash profits or surplus cash flow. We think that apart from growing revenues, profits and ROE it is important that business is generating cash profit or surplus cash flow.

You can easily calculate cash profits of any business by looking at their balance sheet.

To understand the calculations of cash profits, imagine you started a business last year and had nothing in your bank accounts. After one year you had a cash balance of Rs 100 in our bank accounts.

Year 1

Year 2

Difference

Cash at bank

Rs 0

Rs 100

Rs 100

After paying all your taxes and all the other if things remain same, your cash balance had increased by Rs 100. That means we can say that you had made cash profits of Rs 100 in that year.

But during same time if you had borrowed Rs 200 to run that business then your borrowings have gone from Rs 0 to Rs 200 in year 2. It means that if you pay all of your cash against your borrowings, you still owe others Rs 100.

Year 1

Year 2

Difference

Cash at bank

Rs 0

Rs 100

Rs 100

Borrowings

Rs 0

Rs 200

-Rs 200

Cash Profit/loss

-Rs 100

During that same year imagine you had also injected extra capital of Rs 200.

Year 1

Year 2

Difference

Cash at bank

Rs 0

Rs 100

Rs 100

Borrowings

Rs 0

Rs 200

-Rs 200

Capital

Rs 0

Rs 200

-Rs 200

Cash Profit/loss

-Rs 300

Your accountant might have come up with a figure that you are in profits and your business is profitable. But in reality you have lost Rs 300 in this business.

Many businesses give cash dividends to their shareholders. Imagine you had withdrawn Rs 500 as dividends from your above business.

Year 1

Year 2

Difference

Cash at bank

Rs 0

Rs 100

+ Rs 100

Borrowings

Rs 0

Rs 200

– Rs 200

Capital

Rs 0

Rs 200

– Rs 200

Dividends

Rs 500

+ Rs 500

Cash Profit/loss

+ Rs 200

Keeping all the things same then you have made cash profits of Rs 200 from your business.

To give you a better understanding on how I had come to cash profits of Rs 200, let me share with you real examples on how I have calculated cash profits of Hero Motocorp & Reliance Industries for their last 6 months.

Hero Motocorp:

March 2012

September 2012

Difference

Cash at bank

Rs 76.82

Rs 124.35

+ Rs 47.53

Borrowings

Rs 1011.39

Rs 1092.39

– Rs 81

Capital

Rs 39.94

Rs 39.94

– Rs 0

Dividends

Rs 898.74

+ Rs 898.74

Cash Profit/loss

+ Rs 865.27

Hero Motocorp had generated Rs 865.27 Crore as cash profits from its last 6 months business.

Reliance Industries:

 

March 2012

September 2012

Difference

Cash at bank

Rs 39598

Rs 43643

+ Rs 4045

Borrowings

Rs 48034

Rs 44682

+ Rs 3352

Capital

Rs 3271

Rs 3236

+ Rs 35

Dividends

Rs 2755

+ Rs 2755

Cash Profit/loss

+ Rs 10187

Reliance Industries had generated Rs 10,187 Crore in cash profits in last 6 months.

Do this exercise with the businesses you hold in your portfolio and find out which business is generating more cash for you!

If you like to share your views in regards to this post share with us.