Monday, 8 June 2009

Operating Profit before Working Capital changes vs. Operating Cash Flow

Proton's Cash Flow Details

National car maker Proton Holdings Bhd should provide more details in its quarterly cash flow statement instead of just a summary.

Although the condensed statement did show the amount of cash flow generated from operations (operating cash flow), it didn't present the "operating profit before working capital changes", or spell out in detail how the operating cash flow was derived.

There is a huge difference between operating profit before working capital changes and operating cash flow.

Operating profit before working capital changes: This indicates the very basic operating cash flow scenario of a company, with the assumption that payments to suppliers are made on time while collection from client for the sale of goods is also received punctually.

A negative operating profit before working capital chagnes spells trouble for the viability of a company's operations. It means the company has to pour in cash to sustain its operations instead of generating cash from the operations.

The non-disclosure of operating profit before working capital changes denies investors an important piece of information. This is because companies could bump up their operating cash flow by adjusting their working capital, by delaying payment to suppliers or expediting the receipt of cash from customers.

These may blur investors' judgment about the basic health of the business or when they seek to compare the actual operating situation with the previous corresponding period.

Cash flow is the lifeblood of a busines, which is especially important in tough times. In order to give the public a better picture of its operating condition, Proton should present its quarterly cash flow statement in detail.

The Edge Malaysia June 8, 2009

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