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QuestionsCategory: Investor PsychologyExceptional items in the calculation of cashflow to net income ratio
Tony asked 2 months ago

Hi,
In the “Financial Ratio” tab, the cashflow to net income ratio can be found in row 23. Upon checking the functions in this row, it appears that references are made to “Profit attributable to Shareholder” rather than “Profit attributable to Shareholder (Exc. Exceptional Items)“. 
I thought we were supposed to remove any exceptional items in any calculation involving earnings. Should this calculation be done with reference to “Profit attributable to Shareholder (Exc. Exceptional Items)” instead? 
Thanks,
Tony

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1 Answers
Victor Chng answered 2 months ago

Hi Tony, 
 
I am just being conservative with the figures. Let me show you the example below:

Example A
Profit: $100m (Include $20m exceptional item)
Cash flow: $100m 
Cash flow to net income will be 1x
 
Example B
Profit: $80m (exclude $20m exceptional item)
Cash flow: $100m 
Cash flow to net income will be 1.25x
 
It really depend on how conservative or aggressive you want to be. I always choose to be more on the conservative side.
 
Hope this helps :)

Victor Chng replied 2 months ago

Do note that you can also use example B method. There is no right or wrong on this.

Tony replied 2 months ago

Oh I see. Thank you, Victor!

Victor Chng replied 2 months ago

Welcome Tony :)