Cash flow analysis

The company's cash flows from operating activities were inadequate to cover depreciation and dividend payments from FYI to IFFY. This indicates that HEAD Banks cash flow engine is not generating enough cash to keep the company whole for those three years. However, the company generated excess cash in IFFY, which was used for growth and investment purposes. Thus, the cash flow engine is not very powerful. However, it is showing signs of recovery in the recent years. Pinpointing the Good News and the Bad News The capital expenditure shows an increasing trend and is around 1 . Xx of appreciation.In addition, it made significant investment in subsidiaries and Joint-ventures, which is another growth indicators. However, these indicators have not remained consistent throughout. Such investments were only made in FYI 1 and IFFY. HEAD Bank has consistently borrowed from other banks in the form of term deposits and demand deposits to pay dividends and for capital expenditure. This can be cons idered as a bad news because it doesn't have sufficient cash flow from operating activities. Puzzle Since the company is operating in the Banking and Finance Industry, Reserve Bank ofIndia norms mandate that the company hold a large proportion of cash along with significant deposits with the RIB (CAR and SSL norms) in order to maintain liquidity. The cash and bank balances held by the company has ranged from xx to xx of their net income. Earlier, we identified a few unusual line items, which are explained as under: In IFFY, RIB increased policy rates by 1 . 75% and Rib's borrowings against SSL increased by almost 270%. After adjusting for this, cash flow from operating activities shows a positive figure in IFFY.In the cash flow from operating activities, the cash used in distributing loans & advances as well as making investments (operating activity since it is a bank) exceed the cash generated from increase in deposits. This has resulted in a negative cash flow from operating activ ities in 3 out of 5 years. This requires the company to seek outside sources for funding such as financial borrowings from other banks and financial institutions. This may not necessarily be a negative sign if the returns from operating activities exceed the net borrowing costs and hence reaping the benefits of leverage. Housing Development Finance Corporation