Question

Hi, I have a question as follows:
Identify material difference between reported total cash flow generated by operating activities and sustainable operating cash flow and
how strong is company's sustainable cash flow from operations and its sustainable free cash flow?

I don't understand bold sentence. I know reported total cash flow is total cash flow that I see in Cash Flow Statement. But what does material
difference means? Can you help me, please? Thaks.

Answer 1

1. Definion :

Reported cash flow from operations is the cash flow generated due to routine business activities i.e. activities excluding sale or purchase of long term assets and financing activities  

Sustainable cash flow on the other hand refers to the cash flow which is repeatitive in nature and can be regenerated in the near term and sometomes for extended period of time.

It is a continuous stream of revenue which are not due to abnormal business circumstances.

2. What does it include ?

Reported cash flow from operations include all the business related activity for the given year i.e revenue , rent , working capital changes etc irrespective of the fact it is due to normal business conditions or because of some external one time change eg: a one time order which is double the normal sales of company

Sustainable cash flows include only those revenues and expenses that occur in a normal course of business as observed oher the years.

One time events such a big order that never occured before or a sudden expense which isn't likely to occur again are excluded from calculating the sustainable cash flows.

It includes repeatitive expenses such as rent, salaries to employees etc

3. Significance :

Reported cash flow from operations is important as it tells us the real pictures of the company for that year. Positive operating cash flows are important for the company as it reflects if company is able to generate cash from the business activities and not due to sale of assets or raising finance.

Sustainable operating cash flows provide a long term view of the company on how it manages its cash. It ignores one time events and nornalises them for over a period of time.

Because of its repeatitive nature, sustainable cash flows are more likely to be used for valuation purposes rather than reported operating cash flows.