Cash Flow Analysis

Cash Flow Ratios (Asian Paints) 2017 2016 2015 2014 2013
Operating Cash Margin 9.97% 14.62% 8.88% 11.86% 10.82%
Current Liability Cover 0.33 0.50 0.30 0.39 0.26
Capital Expenditure Cover 2.32 3.03 3.42 8.75 1.86
Long Term Debt Cover 2.87 5.01 3.10 4.14 4.20
Cash Interest Cover 62.52 103.53 42.85 54.80 34.39

Cash Flow Ratios (Akzo Nobel) 2017 2016 2015 2014 2013
Operating Cash Margin 4.67% 8.88% 5.67% 6.48% 8.59%
Current Liability Cover 0.15 0.26 0.16 0.15 0.23
Capital Expenditure Cover 1.87 6.74 3.19 1.42 1.65
Long Term Debt Cover 1.83 3.20 1.72 1.91 2.45
Cash Interest Cover 69.67 203.38 103.60 113.87 138.67

The major source of cash for both the companies are core operating activities. The operating
cash to profit margins are 102% and 96% for Asian Paints and Akzo Nobel, respectively.
For Asian Paints, the operating cash margins are consistently over 80% of the accrual based
margin ratio. Hence, sales and profits do not look like they are amenable to earnings
management. The percentage increase in trade receivables never exceeds 20%, hence there are
no red flags here. For Akzo Nobel also, the margins are over 80% barring 2017, when the
operating cash margin is 60% of the profit margin. This is coupled with an increment of 25%
in trade receivables and deserves a closer examination.
The current liability cover for Asian Paints hovered between 0.26 to 0.50 from 2013-16, with
the 2017 value being 0.33, while the number for Akzo are even lower at 0.15-0.23 over the
years. These figures feel a bit uncomfortable as it seems that the companies can default on their
current obligations unless they dip into their financial assets. However, the respective operating
cash flows are healthy and do not corroborate our inference of a possible liquidity strain.
Asian Paints’ capital expenditure cover, for 4 out of 5 years, remains above 2, implying that
the company can finance its expansion plans (if any) by itself and without any external support.
The numbers for Akzo, though lower relatively, are still healthy and do not raise any serious
concerns. The net investment cash flows are positive for Asian Paints indicating it has matured
as a company, a fact validated by its consistent market share, while they are negative for Akzo
Nobel, signifying that it is investing heavily towards growth.
The long-term debt cover for both the companies is a consistently healthy number with that of
Asian Paints being above 2.87 and Akzo Nobel above 1.72, this shows that the companies
generate enough cash in relation to their debt.
The interest covers are extraordinarily good for both the companies, indicating that there will
not be any problems in timely interest payments. The dividend payment as a fraction of
operating cash is 47% for Asian Paints on an average which is normal for a mature company,
however it is a very high 150% for Akzo Nobel with very wide fluctuations from 35% to 225%
which might be in hopes of increasing share prices.
Both the companies finance themselves using their own capital and are not reliant on external
sources.