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Cash flow from operation: 2020 2029Net income Adjustments to reconcile net income

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Cash flow from operation: 2020 2029Net income

Adjustments to reconcile net income .... 82408 178,219  

cumulative effect of change in accounting principal,

net of $20 million of income taxes 137080   0

Depreciation and amortization 127,560 103,554  

Noncash portion of restructuring cost 10000 0

Gain on sales of business (13, 100)   0

Equity in loss of FutureTech, net of dividends

Deferred income taxes 10,907   211

 

Change in operating assets and liabilities:

Decrease (increase) in accounts receivable 51,061 (25,129)    

Increase in inventories 48883 (7,739)     

Decrease (increase) in prepaid expenses and other CA 240 (3605)

Increase in investments - trading (7,319)   (8,965)  

Increase in accounts payable, deferred income

and accrued liabilities (81840) 4828

Increase in income taxes payable 14,476   32,916  

Increase in other liabilities 4,467   17,584  

Total adjustments 142,277   107,521  

Net cash provided by operations 224,685   285,740   

 

Cash flow from investments:

Additions to property, plant and equipment, net (166,911)   (179,374)  

Purchaser of short- term investments available for sale (143,449)   (153,269)  

Maturities of short- term investments available for sale 152,880   192,073  

Long term investments (56,110)   (51,599)  

Proceeds from sale of business 27,000   0

Increase in other assets (370)   (33,650)  

Net cash used for investments  (186,960)   (225,819) 

 

 

 

2014 2015 2016 2017 2018 2019 2020

Reported cash flow from operations $33 $89 $183 $210 $144 $286 $225

Reported cash investments $66 $67 $163 $239 $306 $226 $187

Net investment in interest bearing

securities 0 0 $73 $9 $62 $12 $47

Interest income 0 $1 $5   $8 $17 $16 $17

Interest expense $6 $7 $7 $4 $11 $13 $11

Return on common equity (ROCE)  4.1% 11.0% 15.6%   20.2% 22.7% 18.3% 7.4%  

*figures in thousand  

Cloud DigiTech, Inc., manufactures, and markets a broad line of high-performance, linear, mixed-signal, and digital integrated circuits (ICs) that address a wide range of signal processing applications. The company's two principal product groups are general-purpose, standard-function linear and mixed-signal ICs and system-level ICs. The latter group includes general-purpose digital signal processing (DSP) ICs and application-specific devices that typically incorporate analog and mixed-signal circuitry and a DSP core. Cloud DigiTech's third product group consists of devices manufactured using assembled product technology.

Nearly all of Cloud DigiTech's products are components that are typically incorporated by original equipment manufacturers (OEMs) in a wide range of equipment and systems for use in communications, computer, industrial, instrumentation, military/aerospace, automotive, and high-performance consumer electronics applications. Refer to the above attachment for a portion of Cloud DigiTech's cash flow statements for 2019 and 2020.

Required:

(a) Calculate the free cash flow that Cloud DigiTech generated from operations in 2019 and 2020. With the aid of the above exhibit, explain a history of the FCF generated from 2014 to 2020.

 

(b) The firm earned its highest return on common equity(ROCE) in 2017 and 2018 when its FCF was lowest and it earned a relatively low ROCE in 2020 when it generated a relatively high free cash flow. Explain this negative correlation between profitability and cash flow.? Will it always be the case? Justify your answer.

 

(c) Cloud DigiTech's 164 million shares traded at $29 each at the end of 2020 and the firm carried little net debt. Calculate cash flow ratios for the firm. What do they mean?