FREE CASH ANALYSIS

CASH FLOW:
Cash Flow is the cash that a company generates in a certain period of time. The sources of the cash flow are four:​

1. Cash from Operations
2. Cash from Working Capital
3. Cash from Investments
4. Cash from Financing

STANDARD APPROACH
 
Cash from Operations:
Generally: NET INCOME + DEPRECIATION. Additional items need to be specially considered:

•          Are there extra-items that particularly impact the Net Income?
•          Are there Non cash items, either income or expenses, in the Net Income?
•          Are there generic provisions in the Net Income?

 
Cash from Working Capital
It is the requirement or surplus of cash generated by current activities of the company:
-          Inventory (variance)
-          Receivables
+    Suppliers
+    Other Creditors (taxes, personnel, etc)
 
Cash from Investments
It is the net result of Capital Expenditures (CAPEX) as a result of new Investments (fixed assets, financial assets, etc) and disinvestments.
Be aware that a disinvestment (sale of assets) can generate a profit or loss (reflected in the P&L statement and thus in the Cash from Operations, but it also has a cash component that needs to be considered: an asset with a Book Value of 100, sold on 100, generated 0 impact in the cash from operations, but generates 100 in cash from de-investments.
Cash from Financing
It is the result of the banking activities of the company as a result of loan repayments, ST bank facilities variance and new financing.
 
The result of the different sources of cash result in the movement of the Cash (and equivalents) at the end of the year and shows the ability of the company to generate enough cash to pay its commitments.

 
SIMPLER APPROACH
 
As a simpler approach, we consider the Cash Flow from operations to attend the CMLTD (or the EBITDA to meet the CMLTD + interests), considering the repayments on the existing debt plus the new repayments from the new debt.
The conservative approach is to consider the cash flow from the recent years, without any add from the new investment, versus the repayments of the existing PLUS the new debt, which considers that maybe the new project will fail and if so, if the existing operations can repay the debts.
Taking this approach assumes certain things that the underwriter needs to validate in his analysis:
-          That cash from working capital doesn’t vary or, if it varies, it is financed by other sources.
-          These sources can be new ST bank facilities, which need to be consider if this is achievable by the company depending in its P&L, leverage, bank relationships, etc
-          That the new investments are financed with other sources.
-          These sources are usually new LT bank facilities, which also need to be assessed if achievable in the current environment.
To determine the CMLTD we usually refer to the audited report, to information provided by the customer, or to other sources such as CIRBE. In the case of small deals or when we are not able to drill down this information, a more simplistic approach can be taken which is to determine a standard repayment schedule under standard market terms in the Spanish markets, which can be a repayment of a loan/lease over a period of 48-60 months and a mortgage over a period of 10-12 years.