Business document

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Unit 4 – Cash Flow Analysis
Elton Tooahnippah
University of Oklahoma – College of Professional and Continuing Studies
LSAL 5223 – Financial Leadership
Dr. Robert Stauffer
October 18th, 2021
I certify that I have read a student’s Guide to Academic Integrity at the University of Oklahoma,
and this paper is an original paper composed by me for this course. Except where properly cited
and attributed, it has not been copied or closely reworded from any other source and has not been
submitted as a whole, or in part, for credit in any other course at OU or any other educational
institution. It has not been created or submitted for any other purpose such as a job assignment at
my workplace or any other agency.

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Unit 4 – Cash Flow Analysis
This paper will analyze the cash flow statement for AT&T. I will analyze the cash
balance changes made by various adjustments to determine the liquidity of AT&T by looking at
three main sections (Siciliano, 2015). I will investigate the operations, investing, and financing
components of AT&T’s cash flow statement for the year ending 2017 to the end of 2020. Cash
flow from operations is internally generated revenue rather than cash from debt or outside
investments (Investopedia, 2012).
When calculating operations cash flow, we take the net income from the income
statement and adjust non-cash charges and the assets and liabilities. The assets and liabilities can
include depreciation, accounts receivable, expenses like utilities and salaries, and inventory
changes. The next component for analysis is cash flow from investing activities. This area
reflects the cash made or spent buying fixed assets like buildings and equipment or stock and
securities along with other forms of investment (Schwarz, 2020).
The final component of AT&T’s cash flow statement analysis will focus on the financing
cash flow. The funding from financing cash flow is cash from creditors, owners, and investors
and consists of dividend transactions, equity, and debt on the statement of cash flows (Schwarz,
2020). These three sections will provide data that shows us if AT&T has the cash necessary to
run their operations and complete transactions by subtracting their current liabilities from current
liquid assets to determine overall liquidity.
Cash Flow Analysis
AT&T shows a net income for the year ending 2020 of negative $5.2 billion and a net
cash flow from operations (NCFO) of $43.1 billion. These two numbers seem drastically far
apart, so I will take a closer look at the contributing transactions. AT&T shows a depreciation

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adjustment of $37.1 billion and a net income adjustment of $23 billion. While easily accounting
for depreciation for buildings and equipment, they do not detail the actual accumulated
transactions that make up the net income adjustment. With the net income adjustment at over $20
billion, I recommend a more comprehensive look into the money's origins.
To gain more insight into their operational performance during the four years, I will
determine the operating cash flow (OCF) to sales ratio (OCF/S). To get this number, we must
divide the OCF by the net sales revenue and multiply the answer by 100. Year ending 2020,
AT&T had an OCF/S of 47%, meaning that for every dollar of sales, it received $0.47 of cash
(Jun, 2020). This number is imposing but let us look at the data from the prior three years.
Year ending 2019 shows an OCF/S of 50% and 48% for the year ending 2018 and finally
46% for the end of 2017. AT&T has had a steady increase of 2% OCF/S annually except for a
3% drop in 2020. The fact that each dollar of sales generates $0.03 of cashless tells us that costs
have increased. The increase in costs could be more debt, but I believe AT&T saw a 9.5% drop
in net sales from 2019 to 2020 from $97.1 billion to 91.8 billion.
The subsequent analysis I want to perform is the operating cash flow ratio (OCFR), also
known as the current liability coverage ratio. This ratio is different from the OCF/S because it
determines how well a company can use internally generated cash flow to pay off current
liabilities (Corporate Finance Institute, 2020a). To determine the OCFR, we divide the cash flow
from operations by the total current liabilities located on the company balance sheet under
current liabilities. AT&T had a 2020 cash flow from operations of $43.1 billion and total current
liabilities of $63.4 billion. Using the above formula, we get an OCFR of 0.67%.
An OCFRof 0.67% means that AT&T earns $0.67 from operating activities for every
dollar of current liabilities. Before I discuss what this means, let us look at the OCFR for the

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prior three years. In 2019 AT&T had an OCFR of 0.71%, 0.68% for 2018 and 0.47% in 2017.
Anything less than a 1:1 ratio is undesirable because the company is not earning enough from
operations to cover its short-term liabilities and is in immediate need of more capital (Corporate
Finance Institute, 2020b).
The following section I will be investigating is the cash flow from investing. This area
focuses on debt and equity transactions, including the purchases and sales of assets (Siciliano,
2015). To better understand AT&T’s financial liquidity and health, I will determine its free cash
flow (FCF). The FCF is the total cash a company has left after paying all operational costs,
including taxes and interest. The FCF is money that the company can use as it chooses.
To determine the FCF for 2020, I must subtract the capital expenditures from the
operating cash flow giving us an FCF of $27.5 billion. Now, let us look at the prior three years to
understand better what this means. In 2019, AT&T had an FCF of $29 billion and $22.4 billion
in 2018. Year ending 2017 resulted in an FCF of $17.4 billion, showing an average annual
growth of roughly $5 billion. Once again, 2020 showed a loss in this section of $1.5 billion.
I believe this deficit is directly related to a nearly $2 billion decrease in accounts
receivable income from 2019 to 2020, along with a nearly $2 billion increase in other operating
costs. Although $27.5 billion is a considerable amount of money, it is insignificant compared to
the total liabilities for 2020 of $364.1 billion. AT&T is consistently earning less from sales and
internal operations than it needs to cover the short and long-term debt. Over the four years,
AT&T shows cash flows from investing to be over -$19 billion in 2017, -$63.2 billion in 2018, -
$16.7 billion in 2019, and finally -$13.5 billion in 2020.
These numbers are a direct result of capital expenditures and either investment purchases
or losses. It is impossible to tell without getting data from more detailed reports. The only

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positive I see is that except for 2018, the investing deficit is shrinking each year. The cause of the
shrinking losses could be better investment decisions or simply having fewer investments
available to lose.
The final area of analysis is the cash flow from financing activities (CFF). This area
documents AT&T’s capital raising, dividend payments to shareholders, selling or purchasing
stock, and receiving or paying cash on loans (Furhmann, 2020). The CFF section looks
promising for AT&T regardless of the connotations of the negative numbers. In 2020, AT&T
showed -$1.5 billion in the sales and stock purchase line, which means they repurchased that
value in company stock. They raised working capital on the previous year by issuing additional
stock to investors.
Referencing the cash flow statement for AT&T, I can see that in 2018 they raised $7.3
billion issuing stock, meaning they had enough cash flow available in 2020 to repurchase $1.5
billion of it. Another interesting line item is the net borrowings. Here it shows -$11 billion,
which indicates that they repaid a large quantity of debt to creditors. The other financing section
also shows a negative amount of -$4.6 billion. I gather from this that it was likely purchases of
securities or pay-out of dividends.
The CFF shows that AT&T has consistently paid down debt each year, but the amounts
fluctuate wildly from -$35.9 billion in 2017 to -$9.4 billion in 2018, followed by -$16.8 billion in
2019. Beyond the yearly flip from selling stock to repurchasing it, this section is consistent. The
net cash flow from financing activities has been maintained at -$25 billion with a standard
deviation of +/- $1 billion except for 2020 at -$32 billion. Overall, I do not see anything of
concern in this area.
Best Practices

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When doing financial analysis, it is imperative to verify the numbers (Liston, 2017). I
have found that when I first read the necessity of this, I decided to do it myself on a few different
financials and managed to find one that was incorrect. Now, I begin each analysis by verifying
the necessary formulae and doing the math because one wrong number can completely change a
company’s financial outlook on paper.
Large groups of numbers must break down into manageable data. Rather than look
through each line item and attempt to determine the significance in the bigger picture, I find
ratios the fastest way to determine valuable information. The first thing I identify on the cash
flow statement is the cash flow from operations/sales ratio. This ratio is an immediate identifier
of how much of each dollar of sales are cash (Jun, 2020). The OCF/S indicates profitability, and
it is vital to verify that growth in operating cash flow is equitable to sales over time to show
stability.
Another valuable ratio that I use to identify how well a company utilizes assets to
generate cash flow is the asset efficiency ratio. To get our number, we divide the CFO by
average total assets, and for the year ending 2020, we get 8%, meaning that AT&T generates
$0.8 of operating cash flow for every dollar of assets they own. The asset efficiency ratio is a
prime indicator of profitability for any company and is vital to utilize (Keythman, 2017). I
recommend using the simple operating cash flow ratio (OCFR) AKA current liability coverage
ratio (CLCR) to identify any potential solvency issues.
The OCFR is a key indicator of a company’s ability to pay current liabilities and provides
insight into its debt management practices. To get this number, we must divide the CFO by the
current liabilities, and the higher the number, the better. As I mentioned above, for 2020, AT&T
has an OCFR of 0.67%. An OCFRof 0.67% means AT&T’s current cash flows can pay for 67%

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of current liabilities. Each number from one up equals 100% of current liabilities, so this quick
ratio shows that AT&T is cash poor.
For the sake of time and space, I will finish with the long-term debt coverage ratio
(LTDCR). This ratio does what its name would suggest; it identifies how much cash from
operations is required to pay off long-term debt and the viability of new debt without
jeopardizing the company. To get our number, we must divide CFO by long-term debt. As an
example, in 2020, AT&T had an LTDCR of 0.28%. With long-term debt drastically higher than
current liabilities, this number shows that AT&T can only cover 28% of its total long-term debt.
Again, this is an undeniable identifier that AT&T is cash poor.
Conclusion
No matter how I look at things, AT&T is a company in trouble. They have repurchased a
small amount of stock and paid down a small amount of debt, but they are only digging their
hole deeper. The consistent drop in net income combined with the annual drop in all areas of
cash flow indicates that stock prices will drop, and they will sell assets. AT&T will continue to
be plagued by alleged financial improprieties causing investors to lose faith and abandon ship.
It is not enough that total sales and gross profit are down across the board, but the
inclusion of charges against top executives in collusion with 20 financial firms attempting to
manipulate the financial markets could be the nail in the coffin for AT&T. I would not be
surprised to see them broken down and sold off piece by piece to other organizations.

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References
Corporate Finance Institute. (2020a, January 9). Cash Flow from Operations.
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-flow-from-
operations/#:%7E:text=Cash%20flow%20from%20operations%20is,over%20a%20perio
d%20of%20time.
Corporate Finance Institute. (2020b, January 28). Operating Cash Flow Ratio.
https://corporatefinanceinstitute.com/resources/knowledge/finance/operating-cash-flow-
ratio/
Furhmann, R. (2020, October 19). Cash Flow From Financing Activities: Example and
Explanation. Investopedia. https://www.investopedia.com/articles/investing/120613/cash-
flow-statement-analyzing-cash-flow-financing-activities.asp
Investopedia. (2012, November 28). Analyze Cash Flow The Easy Way. Forbes.
https://www.forbes.com/sites/investopedia/2012/11/28/analyze-cash-flow-the-easy-
way/?sh=6bde53331e62
Jun, J. (2020, April 29). 7 Cash Flow Ratios Every Value Investor Should Know. Old School
Value. https://www.oldschoolvalue.com/stock-valuation/cash-flow-ratios/
Keythman, B. (2017, November 21). Operating Cash Flow to Total Assets. Small Business -
Chron.Com. https://smallbusiness.chron.com/operating-cash-flow-total-assets-
73468.html
Liston, H. (2017). How to read and analyze an income statement. http://articles.bplans.com/how-
to-read-an-income-statement/

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Schwarz, L. (2020, September 3). Cash Flow Analysis: Basics, Benefits and How To Do It.
Oracle NetSuite. https://www.netsuite.com/portal/resource/articles/financial-
management/cash-flow-analysis.shtml
Siciliano, G. (2015). Finance for nonfinancial managers (2nd ed.). McGraw-Hill Education.