Cash Flow Analysis
Cash flow analysis is used for evaluating the sources and uses of funds.
This analysis gives detailed information about the company's financial resources and employment of those resources. Take for instance, the Infosys cash flow statement. It shows Infosys generated Rs.3,256 crore from operating activities. It has used net of Rs.1,065 crore for investing activities, mainly for purchase of fixed assets. Then its total outflow in respect of financing activities amounted to Rs.316 crore, which can be attributed to the increase cash flow for payment of dividends. Its dividend outflow during 2006-07 of Rs.1,343 crore increased by more than 3 times when compared to that of 2005-06 which was Rs.352 crore. This preliminary analysis shows Infosys had considerable cash inflows from operating activities that have been used to a large extent for purchasing fixed assets and payment of dividends.
Even though the simple cash flow analysis gives much more information about the sources and uses of funds, it is important to analyze cash flows in detail. For example, Infosys' cash from operations is increased mainly because of decrease in depreciation, decrease in debtors and increase in current liabilities.
Other Tools
Other tools like debt valuation and equity valuation models also help in financial statement analysis. Present value theory is used in valuation of debt and equity. Another tool is efficient market hypothesis. This tool is used to assess the reaction of market prices to financial and other information.
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