Should negative business cash flow be a concern?

Normally, when looking at the business results of an enterprise, many investors are interested in the revenue and profit factors and often ignore the cash flow factor. In fact, cash flow from business activities is the key point to be able to accurately and comprehensively assess the financial health of enterprises.

Through studying the financial statements of the second quarter of 2021 of listed companies, there are many cases of enterprises with negative cash flows. Typically, in the case of Phu Nhuan Jewelry Joint Stock Company (PNJ), the consolidated revenue and profit after tax for the first half of the year 2021 will grow by 50% and 67%, respectively, reaching VND11,637 billion and VND735 billion.

However, the consolidated cash flow statement recorded a negative operating cash flow of VND257 billion, while the same period last year was positive of VND376 billion.

The reason is due to the sudden increase in expenditure on inventory by VND905 billion compared to the beginning of the year. As of June 30, 2021, PNJ's inventory value was VND7,451 billion, accounting for 81% of total assets, concentrated mainly on goods (accounting for 86%).

Vietnam National Petroleum Group (Petrolimex) also recorded impressive business results with a net profit of VND2,249 billion in the first six months of 2021, while in the same period last year lost VND692 billion.

However, the increase in both inventory value and receivables made net cash flow from operating activities negative by VND2,166 billion in the first half of this year, while the same period last year it was positive at VND2,899 billion.

At the end of June 2021, Petrolimex's total assets reached VND68,380 billion, an increase of nearly 12% compared to the beginning of the year. In which, the value of inventory is VND12,448 billion, up by 32% compared to the beginning of the year; short-term receivables at VND11,528 billion, up by 60%. The large amount of money that has not been collected from customers along with high inventory is the reason for the negative cash flow of Petrolimex.

The cash flow of Vietnam Construction and Import-Export Joint Stock Corporation (Vinaconex) was negative to VND2,676 billion. In the same period last year, this cash flow was also negative VND58 billion. The reason for this situation is due to the sharp increase in receivables. At the end of the second quarter of 2021, the total value of Vinaconex's receivables was at VND16,209 billion, 2.1 times higher than at the beginning of the year.

In which, short-term receivables increased by 85% compared to the beginning of the year, to VND13,827 billion; long-term receivables also skyrocketed from VND209 billion to VND2,382 billion. The company must set aside VND1,314 billion for short-term receivables and more than VND1 billion for long-term receivables. Notably, Vinaconex has VND1,902 billion of bad debt and assesses the recoverable value at only VND586 billion.

With a large value of receivables, accounting for 53% of total assets, Vinaconex has to step up debt to offset cash flow. Accordingly, short-term loans and finance lease debt at the end of the second quarter of 2021 was at VND2,931 billion, up 37% compared to the beginning of the year; loans and long-term finance lease debt also jumped to VND6,857 billion, 3.2 times higher than at the beginning of the year. Vinaconex's total liabilities at the end of the second quarter of 2021 also increased by VND10,000 billion compared to the beginning of the year, to nearly VND23,000 billion, more than three times the equity. This is a potential risk for Vinaconex in the future.

At Loc Troi Group Joint Stock Company, net cash flow from operating activities was also negative VND1,286 billion in the first half of 2021. Accordingly, Loc Troi's inventory was valued at VND4,210 billion, an increase of 68% compared to early 2021. While short-term receivables tend to decrease, provision for bad-term short-term receivables remains high. Liabilities also increased by 38%, to VND5,634 billion and nearly two times higher than the equity of Loc Troi at the end of the second quarter of 2021.

Many other enterprises also recorded negative business cash flow such as Rang Dong Light Source and Vacuum Flask Joint Stock Company (RAL), Dry Cell & Storage Battery Joint Stock Company (PAC), Thanh Cong Textile Garment Investment Trading Joint Stock Company(TCM), PetroVietnam Oil Corporation (OIL).

Risk indicator

According to experts, the case where the money received is smaller than the money spent, shows that the enterprise has difficulty in selling products or it is difficult to recover money.

This means that businesses only record profits on the books, but have not yet received money. At that time, the enterprise will have to compensate with investment cash flow or financial operating cash flow, such as borrowing, raising more capital from shareholders, or liquidating assets.

As in the case of Vinaconex or Loc Troi mentioned above, the cash flow is short due to stagnation on the side of customers and partners that cannot be recovered or is in inventory. While inventory is always subject to downside risk, receivables also have a recoverability risk. Many cases of businesses that have lost hundreds of billions of receivables from bankrupt partners are a good lesson for this problem.

In addition, borrowing capital to make up for the shortfall in cash flow also increases the interest burden as well as financial risks if enterprises cannot structure capital sources to pay due debts.

Therefore, cash flow management is an issue that experts always pay attention to avoid falling into a negative cash flow situation. Recently, the Board of Directors of Mobile World Investment Joint Stock Company approved a resolution to adjust the dividend payout ratio in cash from 10% to 5% in order to give priority to ensuring cash flow for business activities in the context of a financial crisis. The risk of the Covid-19 pandemic continues to be prolonged and complicated.

According to the consolidated financial statements reviewed in 2021, the cash flow of Mobile World is still positive at VND641 billion. However, Mobile World’s Board of Directors has seen possible risks in cash flow. Accordingly, receivables and inventories both increased, leading to an increase in short-term debt of more than VND4,000 billion compared to the beginning of the year, to nearly VND20,000 billion at the end of the second quarter of 2021.

Of course, not every case of negative cash flow is cause for concern. In case enterprises are in the process of expanding production and business, having to import more goods, increase receivables and payables, etc. will lead to negative business cash flow.

However, if this situation persists, it will be alarming, because the lack of cash flow will cause businesses to sink into debt burdens, lower business results. Even if prolonged, businesses may lose their ability to pay. This is also the situation that has been recorded in many enterprises that have been delisted on the stock market in recent years such as VPH, ATG and PXT.