Suggestions to improve Sa Giang's financial performance (2010 - 2015)

MBAVB3

TRAN NAM HAI


SUGGESTIONS TO IMPROVE SA GIANG’S FINANCIAL PERFORMANCE
(2010 – 2015)


MASTER PROJECT
MASTER IN BUSINESS ADMINISTRATION
(PART – TIME)




Tutor’s Name: Dr. TRAN DUYEN DINH





Ho Chi Minh City
(2010)
TRNG I HC M TP.HCM
HO CHI MINH CITY OPEN UNIVERSITY
UNIVERSITÉ LIBRE DE BRUXELLES
SOLVAY BRUSSELS SCHOOL
ii

DEED OF DECLARATION
I, Tran Nam Hai, hereby submit my research paper for oral defense, entitled “Suggestions
to Improve Sa Giang’s Financial Performance (2010-2015)” and truthfully declare that
the above-titled paper is a product of my original research investigation.

Signed on 29
th
January 2011 in Ho Chi Minh City.



Tran Nam Hai















iii

ACKNOWLEDGEMENTS
Foremost, I would like to express my sincere gratitude to my advisor Dr. Tran Duyen Dinh
for the continuous support of my MBA study and research, for his patience, motivation,
enthusiasm, and immense knowledge. His guidance helped me in all the time of research
and writing of this thesis. I could not have imagined having a better advisor and mentor for
my MBA study.

Besides my advisor, I would like to say thanks to Belgian Professors from Solvay Brussels
School, Professors and Lecturers from Ho Chi Minh City Open University for valuable
knowledge and enthusiasm provided to me during my MBA program. Thanks also go to
Mr. Serge Bywalski, program coordinator, and Ms. Bao Tran, program administrator for
their kind and well-arranged coordination which has helped me and my classmates to
attend and finish courses so far.

I thank my colleagues for giving me time and condition to complete my courses while I
am up to neck with works. I also say thanks to my classmates at MBA class for their
cooperation, for discussing, for arguing evenings we were spending time for group study
and for all the fun we have had in the last two years.

Last but not least, I would like to thank my big family: my grandmother, my parents, my
brothers for supporting me spiritually throughout my life and my small family – my wife –
for her silent support while losing her husband to the busy study and work.



iv

Ho Chi Minh City – Vietnam
Jan. 29, 2011

TUTOR’S COMMENT
Title: SUGGESTIONS TO IMPROVE SA GIANG'S FINANCIAL PERFORMANCE (2011-2015)
Author: TRAÀN NAM HAÛI
Tutor: Dr TRAÀN DUYEÂN ÑÒNH
Practicality
Analyzing the financial statements of a company to find the way to improve its financial performance is
the most important responsibility of the top management. The thesis “Suggestions to Improve Sa Giang's
Financial Performance (2011 - 2015)” takes the practical meaning in making financial analysis on a
specific company for the purpose of improving its financial performance in the next 5 years.
Content
The thesis consists of 3 chapters apart from introduction and conclusion. The first chapter gives an
overview of financial analysis literature. The second chapter introduces the Sa Giang Company, and
analyzes its financial statements over the past 3 years. In the last chapter, the author summarizes the
findings from the analysis in Chapter 2 that include 2 financial strengths and 5 financial weaknesses, and
thereby recommends a solution package that includes 5 groups of suggestions for improving the company's
financial performance in the next 5 years. These suggestions are feasible.
Presentation
The thesis is presented in the bright and illustrative way with many tables and figures. The in-text citation
and references follow the guidelines of MBAVB program.
General Assessment
The thesis takes the practical meaning presented in a very good form. The arrangement is systematic and
suggestions are feasible.
Suggested Grade: Excellence
Tutor,


Dr TRAÀN DUYEÂN ÑÒNH
v

ABSTRACT
Financial performance is considered as the backbone of a company’s business. It is
very important to the business operation and even the existence of a company. More
than that, it may cause good or bad effects to related parties of that company like
shareholders, investors, suppliers, bankers and etc. However, as Vietnam is an
emerging market, there are very few studies about the financial management and
performance of a company and what will happen when there is problem in a company’s
financial health. Once Vietnam became an official member of World Trade
Organization, Vietnamese enterprises will have to face foreign players coming into the
local market. In order to compete with foreign companies, it is necessary for
Vietnamese enterprises to have a good financial performance, which will enable the
company to operate its business better like taking more market share, attracting more
investors, expanding business to overseas…and after all, making more profit to survive
this competitive market. This study will have an overview about tools and methods to
analyze financial statements of a company. Then an analysis on Sa Giang company’s
financial statements in three fiscal years is also carried out basing on tools and methods
mentioned above and it will give comments on findings from the analysis as well as
point out some suggestions to improve the company’s financial performance in the
coming time. It is hopeful that financial statement users can apply knowledge in this
study to real life business to get a fundamental analysis for themselves and then
making reasonable decision in their investments as well as improving their financial
management if they have their own business.



TABLE OF CONTENTS
INTRODUCTION 1
I. Rationale of the Study 1
II. Objectives and Questions 2
III. Scope of the Study 3

IV. Methodology 3
V. Organization of the Study 3
CHAPTER ONE: LITERATURE REVIEW ON FINANCIAL ANALYSIS FOR
EVALUATING FINANCIAL PERFORMANCE 4
1.1. The Need for Evaluating Financial Performance 4
1.2. Financial Statements as Data for Analysis on Financial Performance 5
1.2.1 Balance Sheet 6
1.2.2 Income Statement 9
1.2.3 Cash Flow Statement (CFS) 13
1.2.3.1 Cash flow from operating activities 15
1.2.3.2 Cash flow from investing activities 16
1.2.3.3 Cash flow from financing activities 17
1.2.3.4 Free Cash Flow 18
1.3 Financial Ratios Used to Evaluate Financial Performance 19
1.4 Sustainable Growth as a Signal of Financial Health for Development 24
1.5 Other Analytical Tools: Horizontal and Vertical Analysis. 27
1.5.1 Horizontal Analysis 27
1.5.2 Vertical Analysis 29
CHAPTER TWO: ANALYSES ON SA GIANG FINANCIAL PERFORMANCE
(2007 – 2009) 32
2.1 An Overview of Sa Giang Joint Stock Company 32
2.2 Financial Statements of Sa Giang JSC 38
2.2.1 Balance Sheets 38
2.2.2 Income Statements 41
2.2.3 Cash Flow Statements 42
2.3 Financial Ratio Analysis on Sa Giang JSC 42
2.3.1 Profitability Ratios 42
2.3.2 Liquidity Ratios 46
2.3.3 Efficiency Ratios 48
2.4 Sustainable Growth Rate of Sa Giang JSC 49

2.5 Horizontal and Vertical Analysis 52
2.5.1 Vertical Analysis 53
2.5.1.1 Balance Sheets 53
2.5.1.2 Income Statements 56
2.5.2 Horizontal Analysis 57
2.5.2.1 Balance Sheets 57
2.5.2.2 Income Statements 60
2.5.3 Cash Flow Analysis 61
CHAPTER THREE: FINDINGS AND SUGGESTIONS TO IMPROVE SA GIANG‟S
FINANCIAL PERFORMANCE (2010 – 2015) 65
2


3.1 Findings Drawn out From the Analysis of Sa Giang‟s Financial Statements 65
3.2 Suggestions to Improve Sa Giang‟s Financial Performance (2010 – 2015) 69
3.2.1 Suggestions to Improve Asset Management to Enhance Asset Turnover 69
3.2.2 Suggestions to Better Utilize Financial Leverage 70
3.2.3 Suggestions to Control Customers‟ Debts Making Faster Accounts Receivable
Turnover 70
3.2.4 Suggestions to Improve Supplier Relationships for More Free Cash Flow 72
3.2.5 Suggestions to Balance the Growth Rate for More Sales, Investments and
Dividends That Enhance Stock Price 72
CONCLUSION 74
REFERENCES 76

INTRODUCTION
Being better over time in financial performance is essential to any business.
However, measures to improve the financial performance differ from country to
country, and from business to business. As a result, this study “Suggestions to
Improve Sa Giang‟s Financial Performance (2011 – 2015)” develops under the

following 5 dimensions.
I. Rationale of the Study
Vietnam is in the stage that business development is booming. This means more
and more enterprises - both foreign and domestic - appear in this attractive market.
More enterprises appearing will lead to a very strong competition among
companies. In order to survive in this furious and attractive market, enterprises,
especially small and medium enterprises (SMEs) need to be profitable to keep on
their business and develop more. From this view-point, it is supposed that
profitability is very important to SMEs and considered as the backbone of each
enterprise. However, the problem raised in this time is that SMEs seem to have
difficulties in controlling their financial performance; therefore they cannot be
profitable and cannot have the competitive advantage compared with foreign
enterprises due to the financial problem and financial constraint. It is supposed that
a suitable financial performance will help SMEs to be financially independent and
easy to survive in the furious times.
In the recent time, the Vietnamese market, which is very attractive as mentioned
above, also has faced economical and financial chaos making hard time for SMEs.
For one style of SMEs, which is Joint Stock Companies (JSCs), the turbulence in
economics and finance will be more difficult for them because they are directly
exposed to the public. Therefore, the financial performance of this kind of SMEs
will be crucial for their development because the investors will expect the stock
price going down or going up based on the financial performance of that company.
2


Stock price of listed companies will partly show the company‟s value and the
potential to develop. However, there is very little study showing the way to
improve the financial performance and the stock price of the joint stock companies.
This study will hopefully contribute to the development of JSCs, particularly Sa
Giang JSC, through the improvement of financial performance and thereby stock

price.
II. Objectives and Questions
Objectives
This study is a secondary research basing mainly on the past and existing data and
information of a joint stock company naming Sa Giang. This is a JSC specializing
in manufacturing, importing and exporting its products to other areas of the country
as well as the world. The aims of this study are:
- To introduce Sa Giang JSC and its business
- To analyze the environment that affects the company‟s activities
- To analyze the business operations of the company basing on the financial
statements of the company and other factors
- To evaluate the company‟s performance
- To suggest some ways to improve the financial performance
Research Questions
The Research Area:
- Financial Performance Evaluation of JSC.
Research Questions:

- What are main factors that affect the financial performance of a company?
- What could be done to improve the current financial performance of Sa
Giang JSC?
- How should Sa Giang cope with a short-term chaos caused by the macro
environment?
3


III. Scope of the Study
This paper will mainly concentrate on the available data and information of the
company such as financial statements of the company as well as the macro
economy information to analyze the financial performance and the operation of Sa

Giang JSC. After the analysis, this paper will point out some financial managerial
suggestions to improve the financial performance of Sa Giang.
IV. Methodology
This is a secondary research basing on the data and the information of the company
and the economics information. The method focuses on using financial statements
to analyze the current financial situation of the company and then comparing the
result from the analysis among 3 fiscal years to see if this company has been doing
better or not.
V. Organization of the Study
This paper consists of five parts. The first part is the introduction that includes the
research background, objectives, and methodology. The second part is Chapter one
which is an overview about financial statements and financial analysis. Then
Chapter two is the analysis of Sa Giang financial performance and operation. The
third Chapter comes with the suggestions to improve Sa Giang financial
performance and stock price. After this chapter, there will be a conclusion that will
summarize the content of this study.
In a word, the study flow starts with literature review on financial analysis for
evaluating financial performance, then goes to financial analysis on 3 fiscal years
of Sa Giang Company, and finally comes up with findings and suggestions to
improve Sa Giang‟s financial performance in the next five years.




4


CHAPTER ONE
LITERATURE REVIEW ON FINANCIAL ANALYSIS
FOR EVALUATING FINANCIAL PERFORMANCE

Introduction
Financial performance is now considered as a backbone of a company and it is
crucial to the survival of that company. However, there is a sad fact that nowadays
many companies have been in trouble with financial constraint, and a lot of
companies have gone bankruptcy due to lacking the reasonable awareness of
financial performance of the company. This will not only affect the company‟s
management but also destroy the benefit of the company‟s shareholders, especially
for those with limited knowledge about the financial analysis. This section of the
study will emphasize on the tools for analyzing the financial performance of the
company and the way through which the financial statement users can evaluate a
company financial health. This section will be divided into five main parts. The
first part is about the need for evaluating the financial performance of a company.
After this part, there will be an introduction to company‟s financial statements and
the way we can understand the information in those statements. The third part is
about financial ratios which can be a useful tool for financial statement users in
terms of evaluating the financial status of the company through the information
from company‟s financial statements. The fourth part is about the growth at which
the company can expand reasonably without destroying shareholders‟ benefit. The
last part will introduce two ways through which financial statement users can
utilize to have an easier and better understanding on financial statements of a
company.
1.1. The Need for Evaluating Financial Performance
It is very important for those who are running a business to regularly review and
analyze the financial performance of their business so that they can have in-time
adjustments. Unfortunately, when the business grows, it seems that the company‟s
5


owners will have less time to do this important task. As a result, the company will
have problems and at this time, the company‟s management will rush for the

solutions to solve the problems caused by the neglect of financial review and
analysis. A well-prepared evaluation of financial performance will probably bring
big benefit to the company‟s owners. Let us have a look on the benefit it will bring.
First of all, it will ensure accurate information. Just imagine that if the company
does not have accurate and timely financial information, it will be very hard if
somebody wants that company to have an accurate decision in its operations. The
company will not be able to budget accurately, to anticipate the needs for cash flow
and most of all, it will lose the creditability with third parties that used to believe in
the company‟s financial performance – such as banks, investors, suppliers…
Then, a well financial performance evaluation will help prevent the potential loss
or the unknown loss. Just take an example of this; anyone who runs a business will
be familiar with the terms of “bank reconciliation.” Normally, people will believe
that banks and other financial institutions are right when giving them the
reconciliation. However, banks and those institutions may make mistakes. And
sometimes it will materially change the financial situation of a company due to
these “small” mistakes.
Another benefit that evaluation of financial performance brings to the company is
that it will show the way the company will go in the coming time. And just like
human beings, when people know where to go, then they will find out how to get
there. And once the way is shown, it will be much easier for the company‟s
management to deal with problems happening on the way if there is any.
From these three illustrations, we know that the need for evaluating financial
performance of a company is essential and sometimes it is crucial for the existence
of the company.
1.2. Financial Statements as Data for Analysis on Financial Performance
Before we go further to understand the financial performance of a company, it is a
very good and necessary step for us to have an overview on company‟s financial
6

statements, which are considered as the window through which the management,
investors and those who are interested in the company will look. Basically, there
are three main kinds of statements: Balance Sheet, Income Statement and Cash
Flow Statement.
1.2.1 Balance Sheet
The balance sheet of a company is considered as a snapshot which will show the
financial status of a company at a point in time. It will list all the assets, which the
company owned; and liabilities and equity that are the sources of the company‟s
assets. A sample of balance sheet is shown as follow:














A very basic and very important point of a balance sheet, as its name, is that the
two sides of the balance sheet must be equal with each others. This will make sure
that the source (liabilities and equity) and the use (assets) are agreed together. And
this is reflected in the formula:
ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY
Now we will have a closer look at the ingredients building the balance sheet.
7

On the left side of a balance sheet, we will see the assets of a company.
The asset of a company is divided into two categories; they are current assets and
fixed assets (long term assets).
Current assets:
Jonathan Berk and Peter DeMarzo in their book Corporate Finance published by
Pearson International Edition, Chapter 2, page 21 defined current assets as “Current
assets are either cash or assets that could be converted into cash within one year.”
Current assets contain items which are put in order of liquidity; that is the ability to
be converted into cash from the most liquid to the least liquid. They include:
Cash and cash equivalent: The assets that can be converted into cash in a very
short term.
Example: Bank deposit with the term of less than 3 months, short term
investment…
Account receivable: The assets of the company that can be collected at a certain
point in time in the near future.
Example: Money collected in next month for the products sold today
Inventory: Raw materials, work-in-process and finished goods.
Example: Wheat stocked in the warehouse for making bread.
Prepaid expenses: This is also a type of assets in the balance sheet as a result of
business making payment for goods and services to be received in the near future.
Example: Insurance paid for the employee in the company
Fixed assets:

As the definition on the website:
www.investopedia.com, fixed assets are known as
“A long-term tangible piece of property that a firm owns and uses in the production
of its income and is not expected to be consumed or converted into cash any sooner
than at least one year's time.” Examples of fixed assets are long term investment

like machinery for production, land, buildings, Plant & equipment, furniture &
fixtures.
8


The combination of current assets and fixed assets will be Total Assets of a
company.
On the right side of a balance sheet, we will see the liabilities and the shareholder‟s
equity of a company.
Like the assets of a company, the liabilities of a company will be divided into two
categories: Current liabilities and Long-term liabilities
Current liabilities:
As defined on the website:
www.investopedia.com, the current liabilities are “A
company's debts or obligations that are due within one year. Current liabilities
appear on the company's balance sheet and include short term debt, accounts
payable, accrued liabilities and other debts.”
Account payable: This is the amount of money which a company owes to the
vendors or suppliers for products and services purchased on credit.
Example: Money paid for the raw material purchase in the next 3 months
Short term note: This is the written promise to pay an amount of money in a
definite date in the company‟s operating cycle. One notice at this point is that most
short term notes will bear an interest to compensate for the use of the money until
the day the money is paid back.
Example: Short term loans
Current portion of long term debts: This is a part that has to be paid within a
period of time in a bigger amount owned to another party.
Example: Company has to pay USD25.000 this month for the total bank loans of
USD100.000
Interest payable: This is the compensation of the period for the use of the loan

(mostly from bank).
Example: Every year, company has to pay 10% interest rate for the loan of
USD100.000 – this means that company has to pay USD10.000 of interest for the
use of this loan in the year.
9


Tax payable: This is the amount of Corporate Income Tax that company has to pay
for the tax each year.
Long term liabilities:

As the definition on the website:
www.solutionmatrix.com, long term liabilities are
“A long-term liability, or long-term debt, is a bill to pay, obligation, or debt coming
due in more than a year.”
Shareholder’s equity:

As a definition on website:
www.investopedia.com, shareholder‟s equity is
explained as follows:
“Shareholders' equity comes from two main sources. The first and original source is
the money that was originally invested in the company, along with any
additional investments made thereafter. The second comes from retained earnings
which the company is able to accumulate over time through its operations. In most
cases, the retained earnings portion is the largest component.”
As the name of this statement, the total of liabilities and shareholder‟s equity must
equal the total assets of the company.
1.2.2 Income Statement
Now we have known that the Balance Sheet shows us the financial situation of the
company at a point in time and from that we know the source and the use of the

assets of the company. However, many people will wonder how they can know if
the company is working efficiently or not if they just look at the balance sheet. It is
now time to show them another financial statement of the company and the way
they can see from that statement if the company is working well or not. That is the
Income Statement.
Unlike the balance sheet, which is a snapshot of a company‟s financial status, the
income statement will be a clip of financial performance over a specific accounting
period. It is a summary of the way how a company generates its income through its
core activities. This statement also shows the profit or the loss of a company over a
10


period of time. That is the reason why this statement has another name; that is
Profit & Loss statement.
We will take an example of the Income statement of a popular manufacturing
company; that is Coca-Cola.

11

12


On the top of the income statement, we will see the Operating Revenue, this is the
income from the main activities of the company. In this case, it is mainly the sales
of the soft drink of Coca-Cola.
Then, it comes the Cost of Goods Sold (COGS), or sometimes called cost of sales.
This is the total cost of buying raw materials and paying for all the factors that go
into producing finished goods. For example, COGS of Coca-Cola will include the
cost for water, sugar, flavor, bottling, rental, labor cost… And the difference
between the Operating Revenue and the COGS is the Gross Profit. This is the
amount that the company earns after deducting all the cost that go into the product
from sales.
Then, company will have other cost like Selling, General and Administrative
Expenses (SG&A). As defined on website: investorwords.com, it is the “Income
statement item which combines salaries, commissions, and travel expenses for
executives and salespeople, advertising costs, and payroll expenses.”
It is a little different from the COGS. COGS, as defined, is the cost that go directly

into the finished goods; meanwhile, SG&A is the cost that will indirectly go into
the products.
After the SG&A is deducted from the Gross Profit, we will come to the Operating
Income, or we can call it is the Earnings Before Interest and Tax (EBIT).
All companies will have loans to operating the business, and once using loan, it is
absolutely sure that the company will have to pay for the loan interest. And on the
other way, companies will give loans to others or will deposit money at banks to
have more money in term of interest income. The net off between the interest
income and interest expenses will be adjusted to the EBIT. One more thing that
company will have to pay is the tax expenses. Normally, companies have to pay a
certain percentage of its income before tax to the Tax Office as part of its
obligations.
Once the Interest income/expenses had been added or deducted from the EBIT and
the company had fulfilled part of its obligations to the State in term of Corporate
13


Income Tax, what remains in the income statement is the Net Income or Net Loss.
If company works well, it will have positive income and with this income,
companies will either use for its business like reinvesting in the company operation
or paying the dividend for the shareholders.
1.2.3 Cash Flow Statement (CFS)
The third and also very important statement of a company is the Cash Flow
Statement. As the name of this statement, it will reflect the cash outflow and inflow
of a company, where the source of the cash is and where it goes. Basically, the
source of a company‟s cash comes from three main kinds of activities. They are
Operating activities, Investing activities and Financing activities during the
year. Also, in Cash Flow Statement, we will see the relationship between financial
statements of the company. It will show us how changes in balance sheet accounts
and income statement accounts affect cash and cash equivalents

Let‟s have a look at the Cash Flow Statement of Coca-Cola.















14

15


From the cash flow statement above, we can easily see that the cash of the company
is divided into 3 groups, cash from operating activities, from investment activities
and from financial activities.
1.2.3.1 Cash flow from operating activities
This is considered as the lifeblood of the company and this is also the most
important barometer that investors have. Operating activities include the
production, sales and delivery of the company's product as well as collecting
payment from its customers. This could include purchasing raw materials, building
inventory, advertising, and shipping the product.
Under IAS 7, operating cash flows include:
 Receipts from the sale of goods or services

 Receipts for the sale of loans, debt or equity instruments in a trading
portfolio
 Interest received on loans
 Dividends received on equity securities
 Payments to suppliers for goods and services
 Payments to employees or on behalf of employees
 Interest payments
We can see the first component of the Cash flow from Operating activities include
the Net Income, which is from the Income Statement. Then the net income will be
adjusted with some elements; for example, the Depreciation and Amortization,
which are also from the Income Statement, are added back. Somebody will wonder
why it is so. The reason is that Depreciation and Amortization are not really the
cash expenses. Basically, depreciation is the cost allocation for the assets in a
period of time; therefore, it is not the cash outflow expenses, so we have to add it
back to the net income. Other adjustments will be reflected on the cash flow too.
We will look through them.
16


Changes in accounts receivable on the Balance Sheet from one accounting period to
the next must also be reflected in cash flow. If accounts receivable decreases, this
implies that more cash has entered the company from customers paying off their
credit accounts - the amount by which account receivable has decreased is then
added to net sales. If accounts receivable increase from one accounting period to
the next, the amount of the increase must be deducted from net sales because,
although the amounts represented in AR are revenue, they are not cash.
An increase in inventory, on the other hand, signals that a company has spent more
money to purchase more raw materials. If the inventory was paid with cash, the
increase in the value of inventory is deducted from net sales. A decrease in
inventory would be added to net sales. If inventory was purchased on credit, an

increase in accounts payable would occur on the balance sheet, and the amount of
the increase from one year to the other would be added to net sales.
The same logic holds true for taxes payable, salaries payable and prepaid insurance.
If something has been paid off, then the difference in the value owed from one year
to the next has to be subtracted from net income. If there is an amount that is still
owed, then any differences will have to be added to net earnings.
After all adjustments have been made, we will have the net cash provided by the
operating activities.
1.2.3.2 Cash flow from investing activities
We then move to the Cash flow from the Investing Activities. The same method as
we used in the cash flow from operating activities, that is, when cash is spent, we
have to subtract it from the cash flow and on the other hand, when cash comes in,
we have to add it to the cash flow. From the cash flow statement of Coca-Cola, in
section of cash flow from investing activities, we can see the item Acquisitions and
Investments, principally beverage and bottling companies and trademarks, which
17


means the company has to spend cash on this. Therefore, we can see the cash
outflow of USD179 million. Similarly for other purchases, investments and
acquisitions, the cash will come out of the company. However, when the company
sells its old subsidiaries or old machines, it will have more cash coming into the
company; this will reflect a positive number on the disposal items. For example, we
can see on the CFS of Coca-Cola, there is an item Proceeds from disposals of
bottling companies and other investments, there must be a positive relating to this
item and that amount is USD37 million.
The sum of these cash inflows and outflows from investing activities will provide
the net cash from investing activities.
1.2.3.3 Cash flow from financing activities
From the name of this cash flow, we will immediately think about financial

activities. Look at the CFS of Coca-Cola again; we can see the item of Issuances of
debt. When we issue a debt, for example, issuing a bond, that means we will own a
liability to the bond-holders but that also means we have more money coming to
the company from this debt; this is the cash inflow and we will understand why it is
a positive amount. The same theory will be true to the item Issuances of stock. On
the contrary, when the bond that we have issued comes to maturity, we have to pay
that debt or when we pay dividend for the shareholders, there will be cash coming
out of the company; this will reflect a negative amount relating to these items.
The sum of these positive and negative amounts will result in the net cash from
financing activities.
And the net cash flow is the sum of cash from operating, investing and financing
activities. Just made a simple calculation, we will see it:
CF from Operating + CF from Investing + CF from Financing = Net Cash
18


= 873 + (-599) + 1.817 = 2.091
Then there will be another cash inflow; that is the effects of exchange rate changes
on cash and cash equivalents of USD24 million, so the net cash in the period will
be:
2.091 + 24 = USD2.115 million
After this section, it is clearly that the company‟s financial statements are very
basic sources from which we will get data and information for our use. And we also
know that the financial statements of the company will link to each other and one
change made to this one can affect to the other one.
1.2.3.4 Free Cash Flow
Now that we have a relatively clear overview on the cash flow statement, we
should know something that is called Free Cash Flow. This is a very important
concept because if the company‟s cash flow is not “free,” it will be very tough for
that company to pursue opportunities that enhance the shareholders‟ equity like

developing new products, making acquisitions, paying dividends and reducing debt.
On the website
www.investopedia.com, “Free Cash Flow represents the cash that a
company is able to generate after laying out the money required to maintain or
expand its asset base.” Free Cash Flow is calculated as follow:


We can see easily that the first component of the Free Cash Flow is the Net
Income, which is from the Income Statement; then it is added with the
Amortization and Depreciation from the Income Statement too, which are not really
the cash expenses. After that, there will be more adjustments with this net income