Business Analysis and Management Accounting
Analyzing a cash flow Statement
Introduction
In seeking to enhance evaluation of companies, a cash flow statement is especially useful. It gives the true condition of company and is a good basis to identify cash flow problems and cash flow opportunities in a company. This paper seeks to explore a cash flow statement for Al Hilal Bank, based in the United Arab Emirates to establish the true financial condition of the company at the time the report was done.
Overview of Cash flow Statements
The statement of cash flow reveals the manner in which a company spends it s money as well as showing where that money comes from. The cash flow in a company can be defined is the number that appears in the cash flow statement as net cash, provided by the operating activities’ (Investopedia, 2007).
In literal calculations, cash flow may be said to be the sum of a company’s net income plus its depreciation. This is a non-cash charge that is displayed in the income statement. Cash flow provides a more reliable way to estimate or to gauge a company’s worth especially when seeking to know if a particular company is a good place to invest in. Wallick (2009) notes that cash flow can be an even more valuable measure of a company’s long term financial health as compared to net profits. Cash flow, he further notes that Cash flow is exactly what it sounds like-‘cash generated and used by a company’s businesses (Wallick, 2009).
Usually cash flow is displayed in a financial statement showing three years of data. This statement is used to determine a company’s performance and overall health. The main information disclosed by a cash flow statement and indeed the main purpose for which cash flow statements are made available is to inform stakeholders of how a particular company made its money and how it spent the same in a chosen period of time. Since this is done for three years, it also acts as a base for comparison so as to determine general progress of the company.
The cash flow statement acts as an analytical tool by measuring a businesses’ ability to cover its expenses in the future. As a general rule, a company is seen as doing well if it consistently brings in more money that it spends. This result sin high profits which is the primary objective of a business Cash flow is calculated by adding and subtracting certain items on the statement to the net income.
For purposes of this project, the company AL Hilal Bank was chosen. Its cash flow statement for the year 2010 was analyzed and conclusions made.
An Overview of Al Hilal bank
Al Hilal bank is a major institution and a key industry player in the banking industry in the United Arab Emirates. it is a considerably large institution with many branches all over the UAE. Its main headquarters may be found in Abu Dhabi. Al Hilal Bank majors on banking as its key business activity. It offers banking services in the context of Shari ‘a law. The bank was incorporated in Abu Dhabi in the UAE in June 2007, with limited liability. It is registered as a public joint stock company. Its operations officially began in June, the year 2008. Since then, the bank has grown significantly, with the number of its customer almost tripling every year since its start up.
Islamic Commitment
The Islamic Bank’s key focus has been to build and roll out robust business models to tap the Wholesale and Retail market segments with specially tailored Shari’a compliant products utilizing efficient processes to deliver these products. The Bank’s business philosophy also revolves around the theme of ensuring outstanding service quality, enabled by the best people and technology. In its endeavor to develop itself into a dynamic Islamic financial institution, the Bank has widened its business by developing subsidiaries under the bank’s territory. The subsidiaries include: Al Hilal Auto,Al Hilal Takaful, Al Wataniya Development Fund ,Al Hilal Islamic Bank Kazakhstan,Al Hilal Bank (AHB) and its subsidiaries, collectively known as the “Group”. The company assesses its capital adequacy based on the Capital Adequacy Standards of the Central Bank of UAE (CBUAE) issued in November 2009
under the Standardized Approach .‘(Al Hilal Group, 2012)
The business grew to overcome initial challenges and in just about two and a half after operations began, the bank not only broke even but started making impressive profits as well. In the year 2010, the bank was ranked 11th amongst banks in the UAE in its value as an asset.
The bank has subsidiary businesses that increase its revenue. Its operational definition of ‘subsidiary’ is captured in its 2010 annual report as ‘all entities (including special purpose entities) over which financial and operating policies generally accompanying a shareholding of more than one half of the voting rights (Al Hilal Group, 2012).
In the year 2008, it incorporated Al Hilal Takaful , an Islamic insurance company offering portfolio to manage risk for both individuals and corporate institutions. In the same tune it also introduced Al Hilal Auto, a subsidiary of the bank that acts as a conduit to facilitate financing of motor vehicles. (Al Hill group, 2012).
The institution has continued to distinguish itself in the market by making its services as client-centered as possible. This is in line with the bank’s motto, ‘It’s All About You’. With a well-established corporate governance Structure, the company has been doing. The bank operating business values are encapsulated in four principles which are expressed as follows in the banks creede of values. Te following excerpt is creed of those values;
“Principled
Doing good is not only a matter of principle, it is good business. Honesty and integrity are part of every interaction we have with you. We believe respect can only be earned, and loyalty can never be bought. We believe in taking responsibility and accountability. We believe in doing what is right for you. Doing what is right is always the right thing to do. Performance with conscience.
Professional
The mark of a true professional is being proactive. Anticipating what you need, giving you what you want. Providing answers to your questions, attending quickly and efficiently to your requests, solving problems on the spot. Responding, advising, informing. Actively doing what needs to be done. Anticipating what you need, giving you what you want.
Progressive
Improvement is the partner of progress. Cutting edge innovation at your convenience. A welcoming environment designed around you. Smart, competent staff ready to service you with a smile. Everything from our procedures and processes to products and people have been put in place to make banking simpler, easier and faster for you.
Partnership
In partnership with you, that is the Bank we want to be, whether you are a student, parent, professional or just married. We want to be a Bank that works with you. A Bank that allows you to get on with living your lifethe way you want to. A Bank that helps you make things happen, when you need to. A Bank that values you for being you. A Bank that helps you make things happen” ( Al Hilal Group , 2010).
Any analysis of a cash flow statement, be it for a multinational company or a small food kiosk, , involves analysis of some basic elements of the cash flow statement . These are the funds related to operations, investing and financing.
Cash Flow from Operations
This is the key source of cash generation (Investopedia, 2007). It is cash produced by the company internally from its daily operations or from its key business operations .this is as opposed to cash generated from outside investing and financing activities. It excludes non-cash items such as depreciation and amortization and equity –based cash flows that are reflected on the profit and loss statement (Wallick, 2009). This is cash obtained from the company’s core business transactions.
It also takes into account funds that are generated by or used by the working capital. This refers to ‘cash available from ongoing operations to re-invest in the business, repay debt etc (Wallick, 2009).
Cash flow from investing
This section mainly deals with the amount of cash the company has spent on capital expenditure. These include business equipment, machinery, land or another business.
It also includes the investment such as money market funds (Investopedia, 2007). Some businesses may choose to invest in the expansion of the business, a thing that requires the purchase of new equipment. Some businesses may also choose to expand by establishing other businesses in addition to the main business. This may be done in an effort to expand business reach as well as to increase cash flow. This portion of the cash flow statement as Richards (2010) notes is mainly concerned with cash used to purchase large investments and business property. The sale of businesses or property for cash. On the cash flow statement this will usually be represented by a negative figure which is indicative of money flowing out of the business to spend on capital projects. Cash flow statements from a healthy company will mostly reflect this figure indicating a commitment to re-investing in the business
Cash flow from Financing
This area of the cash flow statement deals with cash flow from financing activities. It refers to movement of cash from financing activities, whether in to the business or out. This kind of activities include taking of loans to finance the business or much more rarely, the issuance of stock to investors. The payment of dividends to individuals who have invested in the Company also qualifies as cash flow form financing. Basically this section is dominated by debt and equity transactions.
In order for companies to grow it is often necessary for them to borrow funds for these purposes. These funds may be borrowed through loans or the issuance of stock. The repayment of the same also fall s in this category. Wallick (2009) observes that uses o f cash for financial purposes include principle payment of debt, share purchases and cash dividend payment. Cash raised by selling stock or bonds or borrowing from the bank would also fall under this category. Likewise the payment of bank loans, the re-purchase of stock and the payment of cash dividends fall under the same category.
“The total cash generated by or used by these three categories is displayed on the cash flow statement as the year’s net change in cash and cash equivalents” (Wallick, 2009).
In the analysis of Al Hilal’s cash flow statements the following three elements were analyzed. In an analysis of the company’s cash flow statement of the year ending December 2010, the following information was revealed:
Analysis of Al Hilal’s Cash flow Statement
The statement starts with net earnings and works backward, adding in depreciation and subtracting out inventory and accounts receivable (Richards 2012).this means earnings before interest and taxes. This figure is over ally a better way to estimate the actual cash available and to use that figure to do company budgets, this is because non-cash assets may not be used to pay of company bills.
In the case of Al Hilal bank, the statement starts of with a figure of about AED131 million. This is a huge improvement if compared to the previous year’s AED73 million start up figure. An analysis of the operating cash flow includes an examination nof the company’s operating assets and liabilities.
The company’s operating assets include Murabaha and Wakala deposits with banks and other financial institutions. A Murabaha contract is a sale of goods with an agreed upon profit mark up on the cost of the goods. A Murabaha contract is of two categories. In the first category, the Bank purchases the goods and makes it available-for-sale without any prior promise from a customer to purchase it. In the second category, the Bank purchases the goods ordered by a customer from a third party and then sells these goods to the same customer. In the latter case, the Bank purchases the goods only after a customer has made a promise to purchase them from the bank (Al Hilal Group, 2012).
Wakala deposits are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Wakala is an act of one party delegating the other to act on its behalf in what can be a subject matter of delegation and it is thus permissible. This is an agreement whereby the bank provides a certain amount of money to an agent who invests it according to specific conditions in return for a certain fee. The agent shall be held responsible if it acts in bad faith or with reckless indifference to Bank’s interest Al H1lal Group , 2012 ).
Deposits earned from these assets in different branches come to almost one and a half billion. This is a significant increase from the previous year when the number was in the negatives. The strong growth in deposits dramatically improved the company’s financial strength and provides a lot of liquidity.
Another item in the company’s operating assets include the receivables form Islamic activities, this is money the institution has received from Islamic activities and this round s up to a figure of almost AED 3 billion . As compared to the previous year the figure we low.
Al Hilal also has Ijara as part of its operating assets. Ijara Muntanhia Bittamleek is a form of leasing contract which includes a promise by a less or to transfer the ownership in the leased property to the lessee, either at the end of the term of the Ijara period or by stage during the term of the contract ( Al Hilal Group , 2012).
In the year ending December 2010, the asset brought in an amount of about one and a half billion in cash flow. Cash flow from IJara the previous year was about AED 2 billion.
The company also obtained cash flow from various other assets to the tune of AED183 million, a marked increase from 2009’s AED 134 million. This is a sign of improvement in terms of return on investment. The fact that the company’s assets were able to generate more income for the company is promising in terms of its ability to handle its bills and debts in future. This is indicative of growing strength in the company.
Among the company’s operating liabilities include the customers accounts present a charge of about 6 billion o n the cash flow statement. This is better tan the previous year which was over AED7 billion. This is the greatest liability for the company although one that the company cant avoid in its operation s.
Other operating liabilities amount to up to AED 82 million, down from over half a billion the previous year. This points to a decrease in the cash flow out of other operating liabilities and is a good sign for the bank. At the end of the financial year 2010, the company generated positive cash flow to the tune of about 2 billion. This w as in contrast to the previous year’s figure where no positive cash flow was generated by operating activities.
Analysis of Cash Flow from Investing Activities
The company cash flow statement shows a negative figure of a little over AEd69 million, up from AED415 million the previous year. This means it spend less money in the purchase of property and equipment as compared to the previous year, which is understandable as the company was still in its setting up phases in the year 2009.
The bank also spent over AED 2 million min the purchase of investment property. This is down from over AEd144 million the previous year.
However investment securities in the same yea brought in AED 171 million. Thus at the end of the financial year the net cash f provided by investment opportunities came to about AED 2 billion. The overall weight of investment decreased.
Cash flow generated from financing activities
The main cash flow from financing activities in the bank included wakala deposits from banks of about AED 343 million. This represents a huge liability to the company. Non –controlling interest in that year was at nil and there was not issuance of stock as compared to the previous year when debt financing in the form of stock had brought in 1 billion. On transactions and non-controlling interests, the group report notes that;
“The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchasesfrom non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity” ( Al Hilal Group , 2010).
At the end of that financial period the net cash provided by financing activities was AED 343,634 million up from more than a billion in the previous year. These figures are strong and indicative of the company’s financial health. The bank reports that in the year ending December 2010, the Total financing amounted to AED 15.3 billion, 49 per cent higher than at 31 December 2009. The Bank successfully overcame market entry challenges in a highly competitive environment.
Total assets amounted to AED 25.7 billion, 48 per cent higher than at 31 December 2009 driven by growth in customer finance. The bank recorded a net profit of AED 133.5 million up from a loss of 74 million the previous year. This resulted in a percentage increase of 279%. This increase is a statement of the company’s financial strength. Such a statement would be very impressive to a potential investor. Sufficient positive cash flow means that the company is able to pay for its investments and its debt at the same time remaining profitable. The company’s financial position places it strategically to be able to avoid liquidity risk, where it is defined as ‘the risk that the Group will be unable to meet its obligations associated with its financial liabilities’ (Al Hilal Group , 2012 ).
“The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The key measure used by the Group for managing liquidity risk ratio of net liquid assets to customers’ accounts. For this purpose net liquid assets are considered as including cash and
balances with banks and Wakala deposits with banks less any customers’ deposits and Wakala deposits from banks, and commitments maturing within the next month” ( Al Hilal Group , 2012 ).
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References
Al Hilal Group ( 2012) Al Hilal Bank Interactive Annual Report . Retrieved from
http://www.alhilabank.ae/. 30 April 2012.
Wallick, S. H. (2009). How to Analyze a Company’s Cash floe Statement. Yhoo voices.
Retrieved from http://voices. Yahoo.com –how-analyses –company’s – cash-flow-
statement/. 30 April 2012 .
Investopedia ( 2007). Analyze cash Flow the Easy Way. Investopedia .com. Retrieved from
http://www.investopedia.com/artucles/stocks/07/easy cash flow.asp. 30 April 2012.
