Using Numbers As Adjectives (NAA)

Many of us fall into the pitfall of using very general terminologies in our financial analysis. Terms like ‘increasing trend’, ‘decreasing’, ‘growing’ or ‘declining’ do not tell you much beyond directional changes. It is very important to be specific in our analysis, knowing exactly where the money has gone to. As lenders, if cash movement were unclear, we would be lost, so is the money.

Being specific in the analysis means being precise in identifying the exact line item on the statements and quantify the amount. Essentially, we should describe the changes in the financials using Numbers As Adjectives. Let’s illustrate this by walking through the FY2018 cash flow analysis of Company XYZ as an example.

Example: Cash Flow Analysis of Company XYZ

Net Cash from Operations in 2018 increased by $0.6K to $20.9K compared to 2017.
Operating cash flow is enough to cover interest expense of $9.3K. However, the operation cash flow is insufficient to service its bank borrowings of $27.6K. Cash requirements after Debt Amortisation stands at $16K.
XYZ’s disposal of $12.7K of Plant, Property & Equipment partially met the cash requirement. A financing requirement of $3.3K remains.
XYZ raised $93.6K of long term debt to meet the remaining financing requirement of $3.3K. More materially, $70.6K was used for amount due to related parties (non-trade).

Use Numbers As Adjectives in all your analyses!

Observe that just by doing this simple exercise of describing the cash flow movements sing Numbers As Adjective, we were able to be pinpoint, with precision, where the sources of cash are, and what were the uses of cash. Subsequently, this will help us in our next steps of analysis and answer some of the questions such as:

  • Is there any structural mismatch?
  • What are the potential areas of cash leakages?
  • Where are the areas of weakness?
  • And so on..

In fact, we should apply this simple, yet powerful technique in all areas, so that we can identify, with sharp razor precision, the potential areas of risks and also revenue opportunities. You have just taken one step forward in making better financial analysis!