Question

1. Among the following different flows, which will be appropriated by both shareholders and lenders: operating receipts, operating cash flow, free cash flows? Who has priority, shareholders or lenders? Why?

2. Do you believe that Internet retail businesses carry high working capital?

3. Does EBITDA always flow directly into a company’s bank account?

4. The industrial group HEEMS shows a net result, 80% of which is from extraordinary income. State your views.

Answer 1

Answer 1:

1st Part:

Correct answer is: Free cash flows

Free cash flow is cash flow after all requirements of operational activities and investment activities are paid. Free cash flow is the cash flow available for appropriation for both lenders and shareholders.

2nd Part:

Lenders have a priority. Lenders provide funds based on contractual agreements. The amount due to lenders is contractual liability and hence between shareholders or lenders, lenders have priority.

Answer 2:

No.

Internet retail businesses do not carry high working capital. The two major components of working capital are account receivables and inventory. Internet businesses mostly have cash sales. Requirement of inventory depends on supply model the internet business is running.

Answer 3:

No.

EBITDA does not always flow directly into a company’s bank account. It may be true if accounting is done on cash basis. In accrual accounting this may not be true. To get operating cash flows we have make adjustments to EBIDTA for changes in working capital.

Answer 4:

In analysis of net results, it is the operating income which is central, not extraordinary income which are non-recurring non-operating income. The business exists because of its central operations and it is operating income which is vital. If in net results 80% is from extraordinary income, it does not speak good for the company in terms its performance. It needs to be evaluated if this is a rare one year phenomenon.