Cash Flow Statement

The Statement of Cash Flows

This statement shows the value created by the company based on how much cash generated year to year. This is the most important section of the financial statements. The cash flow statement strips away all the abstract, non cash items such as depreciation which you see on income statement and tells you how much actual cash the company has generated. The cash flow statement is divided into three portions: cash flows from operating activities, from investing activities and from financing activities.

1st Section – Cash flows from operating activities

Cash Flow from Operating Activities tells you how much cash the company generated from its business. This is the area to focus your attention on the cash generating power of business that we are most interested in.

Depreciation and Amortization

This is not a cash charge. So we need to add this back to net income.

Changes in Working Capital

If a company is owed more money by customers this year than it was last year, accounts receivable increase and cash flow decreases, if it owes more money to suppliers, accounts payable increase and so does cash flow. Finally if a firm pumps more money into inventory that does not sell, cash flow decreases. Inventory ties up capital.

One-Time Charges

This need to be added back when figuring cash flow (similar to depreciation, which is also noncash).

Net Cash Provided by Operating Activities

This is also known as operating cash flow, it is the result of adding or subtracting the previous items from net income. It doesn’t replace net income but if you don’t look at it in addition to net income, you are not getting the full picture.

2nd Section – Cash Flow from Investing Activities

This section involves acquiring or disposing PP&E, corporate acquisitions and any sales or purchases of investments.

Capital Expenditures

This figure represents money spent on items that last a long time such as PP&E, basically anything needed to keep the business running and growing at its current rate. Operating cash flow minus capital expenditures equals free cash flow, or the amount of cash the company generates after investing in its business.

Investments Proceeds

Companies often take some of their excess cash and invest it in bonds or stocks in an effort to get a better return than basic saving account. This number tells us how much money the company has made or lost on such investments.

Final Section – Cash Flow from Financing Activities

Financing activities include any transactions with the company’s owners or creditors.

Dividends Paid

This is the money spent on dividend.

Issuance/Purchase of Common Stock

This is important number to look because it indicates how a company is financing its activities. Rapidly growing companies often issue large amount of new stocks which can dilute the value of existing shares but gives cash for expansion. Slower but more mature companies that generate a lot of free cash flow tend to buy back significant amounts of own stocks though companies that issue many stock options to their employees also buy back stock to minimize dilution. You need to be wary of companies that grant their employees with options and then spend corporate cash on repurchases are essentially selling shares to their employees at low prices and buying it back on the open market at much higher prices at the expense of shareholders.

Issuance/Repayments of Debt

This number tells you whether the company has borrowed money or repaid money it previously borrowed.

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