A solid response jd2. You have some valid points which I will...

A solid response jd2. You have some valid points which I will concede, although I disagree with your conclusion. I did notice the difference between "underlying" profit and actual NPAT. There is a difference of $20m, which they say is made up of the post tax portion of:

Acquisition and integration costs - $5.7m
Outlet rationalisation and brand system realignment - $11.4m
Asset impairment and provision charges - $12.5m

How much of this will have impacted the cash flow statement as a cash outflow compared to if they had not purchased the business? I'm not sure, but I genuinely don't think they spent anywhere near $17.1m in cash outside of their normal operations as a one-off purely due to this business purchase (excluding the business purchase). What do you think? Note that this is a purely voluntary reconciliation that they have done, it doesn't form part of the financial statements and hasn't been audited. As such, it is their own interpretation of "underlying" profit.

I do understand what you are saying regarding the growth absorbing some of the cash flow, however they are purchasing businesses that are positive cashflow, so in my mind cashflow should be increasing from day one of their acquisition, and improve thereafter with any efficiencies they can gain. The exceptions will include redundancies and store closures that occur shortly after acquisition, although I would view this as a relatively minor expense, maybe $2-5m for a GJ acquisition for example, however the positive cashflow from the business purchase should easily outweigh this imo.

Out of interest do you know what the line "amounts advanced to other entities" in the cashflow is referring to? It seems to be a consistently increasing cash outflow which should possibly be included in this analysis. What is the DR side to those transactions? I'm assuming they are the "other financial assets", vendor financing to franchisees. Just did a quick rec and I'm pretty sure that is it, this balance has increased $18m over the last 2 years.

All of that aside though, over the last 3 financial years their operating cash flow, less payments for P,P&E, less dividends is negative $8.8m. Your comment regarding P,P&E cash payments being higher than depreciation may or may not be valid, but I think it would make little difference considering the FY15 cash payments for P,P&E were much lower than the prior two years (i.e. this number would be higher in FY15 if it was due to increasing P,P&E investment). Keep in mind these P,P&E payments are outside of business acquisitions and would be for P,P&E in company owned stores or purchase of franchisee stores with P,P&E included. Even if you factor in some growing pain cash drain, the business isn't generating enough cash imo. Over the last 2 FY approximately an extra $14.3m is tied up in current assets and liabilities outside of cash. Operating cash flow has gone from $31m in FY13 to $35m in FY15 with much more debt and a much bigger business. An average of $7m extra per year tied up in working capital. In that time shares on issue increased circa 25% and debt increased circa 200%.

Gotta go, I do see your points though. But in my view the slide in revenue from brumbys, michels and donut king supports my position that the underlying business is not sound and the net cashflows over the last 3 years are reflective of this. Net assets after stripping out capital raisings has not increased much over 2 years which further supports this. This is probably what it boils down to, after paying dividends they have not been able to significantly increase net assets without doing capital raisings, but they are significantly increasing debt. That trend obviously can't continue for too much longer before having too much debt compared to equity. They still sound acquisitive as well.