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Chris Ridder

 
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  • Alcoa's EPS Smelted By Balance Sheet [View article]
    JRF77,

    My cash flow calculations, though positive, are not as optimistic as Alcoa's method which simply takes operating cash flow and subtracts cap ex.

    Here is another way to calculate free cash flow to the firm from the CFA Institute curriculum:

    " FCFF = EBIT(1− Tax rate)+ Dep − FCInv − WCInv "
    Institute, CFA. Level II 2013 Volume 4 Equity. John Wiley & Sons P&T, 7/9/2012. VitalBook file. Page 213

    I calculated the following values (in millions):

    EBIT = $312
    Tax rate = 37.68...%
    Dep = $349
    FCInv= $258
    WCInv= $47

    Plugging into the above formula one has a free cash flow to the firm of
    $238.44 mm. Unfortunately, free cash flow is not a GAAP measure so companies feel free to use whatever method suits them.
    Jul 10 03:22 PM | Likes Like |Link to Comment
  • Alcoa's EPS Smelted By Balance Sheet [View article]
    Sorry, for some reason my reply was chopped into pieces; so here we go again:

    "Not only that, who says that the accounts payable are even related to inventory? "
    - Alcoa says that on their financial statements! On the balance sheet the line item reads "Accounts payable, trade". Read the definition from http://bit.ly/TV5PiX

    "Definition: A trade payable is an amount billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business. These billed amounts, if paid on credit, are entered in the accounts payable module of a company's accounting software, after which they appear in the accounts payable aging report until they are paid. Any amounts owed to suppliers that are immediately paid in cash are not considered to be trade payables, since they are no longer a liability.

    ...

    Other types of payables, such as accrued expenses, dividends payable, or payroll expenses, are recorded in other accounts in order to more easily identify them.

    A key difference between trade payables and non-trade payables is that trade payables are typically entered into the accounting system through a special accounts payable module that automatically generates the necessary accounting entries, whereas non-trade payables are typically entered in the system with a journal entry."
    Jul 10 12:00 PM | Likes Like |Link to Comment
  • Alcoa's EPS Smelted By Balance Sheet [View article]
    " it [ accounts payable ] should go down in future quarters as the wrap up of smelting facilities is realized"
    - If accounts payable decreases this will lead to a decrease in operating cash flow

    "Not only that, who says that the accounts payable are even related to inventory? "
    - Alcoa says that on their financial statements! On the balance sheet the line item reads "Accounts payable, trade". Read the definition from CFO). The cash flow change in operating accounts does not equal the actual change on the balance sheet. Because the additional inventories and receivables are acquired as part of an acquisition, the cash paid for their acquisition is treated as cash for investment.

    However, reported cash from operations in the year of the acquisition(and in subsequent years) may still be distorted. The degree of distortion depends on whether the level of working capital immediately after the acquisition is maintained over time.

    The potential distortion can be illustrated by considering the inventory acquired. Although the cash paid for the acquisition of the inventory does not flow through cash from operations, the cash received when the inventory is sold does. Thus, CFO is inflated as the proceeds of sale are included while the cost of acquiring the inventory is not. [Bold not in original]

    This distortion will be somewhat mitigated if inventory is continually replaced, as the cash outflows for new inventory will offset cash inflows from sales. However if there is a reduction in the acquired firm's working capital, CFO may be distorted, and careful analysis is required to understand the impact. "

    From: The Analysis and Use of Financial Statements by White, Sondhi, & Fried (1994 Edition) pages 859-861
    Jul 10 11:30 AM | Likes Like |Link to Comment
  • Alcoa's EPS Smelted By Balance Sheet [View article]
    "If inventories were built up at the end of this quarter then they were also paid for in this quarter,..." I disagree with this statement as typically the purchase is financed and a company has an accounts payable liability. Look on Alcoa's balance sheet under "Accounts payable, trade". When this payment is due depends on the terms with the vendor.

    When inventory grows cash flow decreases
    When accounts payable increase cash flow increases
    When inventory decrease cash flow increases
    When accounts payable decrease cash flow decreases

    Hence, the analysis provided about inventories leaves out the cash flows from accounts payable.

    Notice, also that in Alcoa's earnings release that is shows -$33 million of operating cash flow for the first half of 2014
    http://bit.ly/TUOcjj
    Jul 10 08:56 AM | Likes Like |Link to Comment
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