Measure the financial health of a business through cash flow from operations

Cash Flow from Operations – An Important Financial Assessment Factor

When evaluating a company's performance, most investors only look at profits. However, operating cash flow (OCF) is also an important indicator. This indicator shows the company's ability to generate cash from its internal operations and its ability to meet debt repayment needs.

A company's cash flow can vary depending on its industry and business life cycle. In general, companies that have grown steadily tend to have positive and low-volatility cash flows from operations, which are sufficient to fund investments, dividends, and debt, and are generated sustainably from core operating profits and steady working capital turnover.

When a business is in stable operation, the relationship between OCF and the business's profit is a positive relationship.

However, there are many cases where businesses are still profitable but OCF is negative. Late payment from partners leading to increased receivables or large inventories are factors that make it difficult for businesses to turn around capital, even leading to negative business cash flow. If this situation persists, it will erode profits and threaten the business's ability to maintain operations. At that time, businesses are forced to add more money by borrowing or raising more capital...

On the contrary, profitable business combined with positive cash flow is a “measure” showing that the business is developing and growing well, has the potential to continue to make profits and operate steadily in the future. On the stock market, there is no shortage of businesses that meet both of the above criteria, most of which are industry leaders, typically Vinamilk (VNM).

Vinamilk is considered a typical example of solid and stable financial capacity.

Effective cash flow management - Leverage for sustainable business development

Since its listing in 2006, Vinamilk has never made a loss in any quarter. Since 2008, the leading dairy company has made a net profit of thousands of billions each year, at times exceeding the 10,000 billion VND mark. The return on equity (ROE) ratio in recent years has been in the range of 30-40%, this figure and the return on assets (ROA) of 20-30% show the company's effective profitability.

Over the past decade, Vinamilk's annual OCF has been positive at over VND5,000 billion. Even during the difficult period due to the Covid-19 pandemic disrupting economic activities in 2020-2021, OCF remained positive, around a stable level, showing a solid business foundation.

As of March 31, 2023, consolidated net cash balance accounted for more than 24% of total assets. The debt-to-total-assets ratio was at 14%, more optimal than the 10% at the end of the previous year to effectively leverage operations and capital turnover.

Taking advantage of this abundant cash flow from business activities, the company actively invests in expanding the supply of raw fresh milk to improve the ability to control input costs, as well as expand production and business activities, implementing "million dollar" projects such as Lao-Jargo Farm, Hung Yen Super Milk Factory, a beef cattle project worth 500 million USD, cooperating with 6 leading nutrition corporations in the world ... Recently, this enterprise also announced a new brand identity, collaborating with more than 55 world creative experts to upgrade the brand identity after nearly 50 years of operation.

Vinamilk's new brand identity represents a colorful, youthful world.

In the long term, Vinamilk’s strong financial position has enabled it to pursue its ambitious Sustainable Development goals. The company recently announced its roadmap to Net Zero 2050 and announced the first farm and dairy factory to be certified carbon neutral under PAS2060:2014.

This year, Vinamilk aims to increase revenue despite the challenging domestic and global economic situation. Financial experts predict that the downward trend in raw milk prices will help Vinamilk's gross profit margin improve.

Preliminary business results for the second quarter showed total revenue estimated at VND15,200 billion, a slight increase of 1.6% over the same period last year and an increase of 8.9% over the first quarter. With this revenue, Vinamilk earned a profit after tax of VND2,220 billion, an increase of 5.6% over the same period last year and 16.5% higher than the previous quarter.

In the first half of this year, Vinamilk's revenue increased slightly compared to the same period last year at VND29,154 billion, completing 46% of the yearly plan. After-tax profit for the first 6 months reached VND4,126 billion, completing 48% of the yearly target.

Along with positive changes in business results and expectations for the company, VNM's stock price has also increased by more than 10% in the past month. The ability to attract money has also improved significantly with sudden liquidity compared to the previous period. The average matched volume in the last 20 sessions reached 5.76 million units, nearly 6 times higher than the first half of the year.

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