Time for a 3D graph! In the previous post I explained how we will use a different set of values to generate this new 3D-graph. Instead of Profit, we will take Cash Flow provided by Operations (The Net Sales or Revenue still being the total height) and where we usually took Equity and Total Assets, now it will be Current Liabilities (width) and Current Assets (depth).
(Photo by Artem Bali on Pexels)
This combination allows us to compare the Cash Flow to both Revenue (sometimes called Net Sales or Total Sales) and Current Liabilities. Looking from another perspective – top or bottom, the shape of a “building” in the 3D-graph actually shows the current ratio (Current Assets / Current Liabilities).
(Photo by Free-Photos on Pixabay)
If the “ground plan” shows a broad rectangle, the Current Liabilities are much larger than the Current Assets and the Current Ratio will below 1.A deep rectangle means the opposite, indicating that the Current Ratio is above 1. If it is – more or less – a square, both values are balanced, meaning the Current Ratio is about 1.
This week we will start with Amazon to populate the 3D-graph. Other FAANG companies will be added later. The website Chron has an article on ratios related to Cash Flows and Current Liabilities. Quoting from the article:
“Obtain the operating cash flow from the cash flow statement and divide by the total sales found at the top of the income statement. This number describes the efficiency of the company’s efforts of turning sales into cash. If the company has $200,000 in operating cash flow and $1,000,000 in sales, the calculation is ($200,000 divided by $1,000,000) equals 0.2 times.”
As we use the Total Sales for the total height of the building and the Cash Flow from Operations to create the green roof-part of it (beware, a negative cash flow will add a red roof on top of the Total Sales, leaving Total Sales as the yellow part), we have a visual indication of the ratio. Another part of the article is about the Operating Cash Flow Ratio. Quoting from the article again:
“Find the cash flow from operations on the cash flow statement. Divide that number by the current liabilities on the balance sheet to find the operating cash flow ratio. This number gives analysts an idea of how much cash the company can provide beyond its liability payments. If the company has $900,000 in cash flow from operations as well as $150,000 in current liabilities, the operating cash flow ratio is ($900,000 divided by $150,000) equals 6.0 times.”
In the 3D-graph, this ratio is visual, because the width of the building – and the width of the roof for that matter – represents Current Liabilities and the height of the roof shows the Cash Flow from Operations.
Double-click the screenshot to see the live 3D-graph in your browser. For manipulation: Clicking the right mouse-button, moving the mouse up and down will zoom the graph in and out. Clicking left and moving the mouse will tilt the graph in different directions (or move the observer’s viewpoint around a fixed graph – it’s relative of course). Double clicking in the graph translates it and moves the centre at the same time. As a result the way the graph tilts will change. Just try it. If you don’t know how to get the normal position back, just refresh the graph.
Unfortunately Q1 2017, in front of the screenhot (double click and open the real 3D-graph to see all quarters more clearly) shows a negative cash flow. On the other hand both the width of the second buidling (Q2 2017) and the heigth of the green roof are visible and it is clear that the Cash Flow from Operations is about 1/10th of the Current Liabilities.
Finally, we can also see the Current Ratio in the 3D-graph as discussed above. Last quote from the article:
“Find the current assets and current liabilities on the balance sheet. They are line items on the balance sheet. Divide the current assets by the current liabilities to find the current ratio, which is a fast way to calculate a firm’s health. If the company has $600,000 in current assets and $200,000 in current liabilities, the current ratio ($600,000 divided by $200,000)”
This ratio is shown by the top-view or bottom view. From the top we will also see if the Cash Flow from Operations was positive (green) or negative (red), so let’s take the top-view.
Again, double-click the screenshot to see the live 3D-graph in your browser. For manipulation: Clicking the right mouse-button, moving the mouse up and down will zoom the graph in and out. Clicking left and moving the mouse will tilt the graph in different directions (or move the observer’s viewpoint around a fixed graph – it’s relative of course). Double clicking in the graph translates it and moves the centre at the same time. As a result the way the graph tilts will change. Just try it. If you don’t know how to get the normal position back, just refresh the graph.
Be aware that the article is about small businesses. Amazon isn’t a small business of course (its amounts are roughly a hundred thousand times higher than in the example), meaning the calculation will be the same, but the interpretation could be different. As a matter of fact you can see the Current Liabilities are much larger than the Cash Flow from Operations. At the same time, the Current Liabilities are well-balanced against the Current Assets.
(Photo by SilviaP_Design on Pixabay) Wrong Amazon, I know, but a picture of a Kindle or an Alexa is so boring).
Then another comment: all the ratios mentioned can be derived in a spreadsheet. AnRep3D doesn’t replace these calculations, but offers the opportunity to spot the interesting ones from a landscape with dozens of firms over dozens of quarters. There is no need to calculate all the ratios beforehand. Looking at more than one hundred buildings first will give a good impression and help to focus your scarce time on the really important companies at a specific moment. Once you have spotted them, it’s time to deep-dive and look into your Excel, which will provide detailed numbers and 2D-graphs.
For more information, please have a look at our other posts, our website (https://anrep3d.com) or our youtube-channel. Again, the free demo-package (zip) can be downloaded, unpacked in a folder and the .jar file can be started immediately.