Tag Archives: Financial Analysis

Why the cash flow statement matters

November 10, 2017 By in Finance, Analysis Tags: ,

Cash flow for me is the most important financial statement as it can corroborate or invalidate what I see on the income statement. In the last three weeks I’ve looked at the income statements, balance sheet statements, and the link between the two for various companies. Today I will use Shuaa’s Q3 2017 financials to show how the cash flow statement can provide insight into the more famous income statement.

Cash flow basics

A little refresher course in accounting first. Cash flow accounting as a measure of the performance of a company is flawed because it does not reflect the timing of transactions. For example, if a company is paid an annual subscription to provide a weekly magazine, then cash flow accounting would recognise a large income upfront and then the expense of publishing the weekly magazine is recognised about evenly across the year. This can make things look far better than they are. There are other situations where the opposite could happen, or where the effect is on the balance sheet, eg depreciation. Continue reading →

Fast asset growth can mask weak margins

September 8, 2017 By in Analysis Tags:

Growth for the sake of growth is the ideology of the cancer cell.

– Edward Abbey

A recent Financial Times (FT) article discussed the “great aviation disrupters of the 21st century” referring to Emirates, Etihad Airways and Qatar Airways. The article was analysing deteriorating performance amongst these three once high performing carriers. Of particular interest are two points: The first is that annual growth in scheduled seats for these carriers ranged from low to mid teens from 2012 to 2016 but that current schedules forecast 2% – 3% for the UAE carriers and an actual drop of 1% for Qatar Airways. The second interesting point is that the UAE carriers are reported to have a large negative impact on P/L. Qatar Airways apparently does not provide the same levels of transparency as the UAE carriers. Perhaps they would benefit from reading my articles on the value of transparency and corporate governance.

Why are these points interesting? Well, growth went from strong to about flat and yet somehow this hit P/L hard. If growth stops, then P/L should match that of the previous year. One argument that the FT article gives is that lower oil prices is impacting domestic outbound business. But this doesn’t explain things as lower oil prices reduce operational costs. Let’s look elsewhere for some insights. Continue reading →