- Cash Dividends Paid = – Dividends + increase in dividends payable = -17,000 + $10,000 = -$7,000
Now let us take an example of an organization and see how detailed cash flow from financing activities can help us in determining information about the company.
It is indicative of the kind of financing activity which has been undertaken by the company in a particular area. In FY15, Apple incorporation spent $20,484 million in financing activities. Few observations from the above cash flow from financing activity parts are:
- The company has been a steady dividend payer. In the last three years company has been paying a dividend of over $11000 million each year. Investors who don’t wait for capital appreciationCapital AppreciationCapital appreciation refers to an increase in the market value of assets relative to their purchase price over a specified time period. Stocks, land, buildings, fixed assets, and other types of owned property are examples of assets.read more can earn money from the steady dividend paid by the company every year.
- One more important factor to see is the repurchase of shares. The repurchasing of shares is indicative of the fact that the company has been generating steady returns. The company is generating ample cash and is using the same to buy-back stocks. The average repurchase amount over the last 3 years has been well over $35,000 million.
- The third most interesting thing one can see from the above statement is that the company has been taking long-term debts. This might be one of the ways the company is financing its activities. However, as an Apple incorporation, which is overall sitting on a pile of cash, it would be interesting to question why such an entity will take in more long-term debt. It can be either a business decision, or is it because of the fact that borrowing rates have been at an all-time low, and the cost of financing through equity is not feasible. Also, note that the company, on the one hand, is repurchasing shares, and hence taking more money from the equity marketEquity MarketAn equity market is a platform that enables the companies to issue their securities to the investors; it also facilitates the further exchange of these stocks between the buyers and sellers. It comprises various stock exchanges like New York Stock Exchange (NYSE).read more can be counterproductive.
The above image is a historical representation of the cash flow from financing activities of Amazon. We note the following about Amazon’s Cash Flow from Financing activities calculations –
- Cash outflows were majorly related to repayments of long-term debt, capital leaseCapital LeaseA capital lease is a legal agreement of any business equipment or property equivalent or sale of an asset by one party (lesser) to another (lessee). The lesser agrees to transfer the ownership rights to the lessee once the lease period is completed, and it is generally non-cancellable and long-term in nature.read more obligation, and financial lease obligation
- Proceeds from Long-term financingLong-term FinancingLong term financing means financing by loan or borrowing for a term of more than one year by way of issuing equity shares, by the form of debt financing, by long term loans, leases or bonds, done for usually extensive projects financing and expansion of the company.read more installment loans in Maine has continuously been positive and very high. This is indicative of the fact that the company has continuously been borrowing long-term debt.
- Repayments of long-term financing show a huge cash outflow. This is indicative of the fact that the company has been extensively paying off its long term debtIts Long Term DebtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company’s balance sheet as the non-current liability.read more . If we see the two in conjunction, one can see that the company has been taking a constant long term debt position and is paying the equal amount back to banks as part of its debt-repayment schedule (in 2014). Investors can explore this option in more detail to see whether the company is financing its debt by taking more debt.