The Cash Flow Statement

The cash flow statement reports how much cash comes in and goes out of the company over a certain period of time. This might sounds a lot like the income statement, but there is a big difference between the two. Unlike the cash flow statement, the income statement only records revenues and expenses when transactions occur, not when cash is exchanged. But keep in mind that the income statement often includes non-cash revenues or expenses, which the statement of cash flows does not include.

Because cash flow statement shows how much actual cash a company has generated (or lost), it is crucial that an investor uses the statement to better understand a company’s fundamentals. Just because a company’s income statement shows a profit doesn’t mean it cannot get into trouble later because of inadequate cash flows.

There are three sections to the cash flow statement: cash flows from operations, financing and investing. Below we will take a look at all three.

Cash flows from operations shows how much cash comes from sales of the company’s goods and services, minus the cash needed to make and sell those goods and services. Companies that produce a net positive cash flow from operating activities are usually preferred. However, high growth companies are apt to show negative cash flow during their formative years.

Cash flows from investing activities mostly reflects the amount of cash the company has spent on capital expenditures, such as new equipment, addition of property, new buildings or repairs. It also includes acquisitions of other businesses and monetary investments such as money market funds.

Cash flow from financing activities accounts for external financing activities. This section includes the issuance or purchase of common stock, the issuance or repayment of debt, as well as dividends paid to investors.

A company that generates plenty of free cash flow signals to investors that it has very strong fundamentals. Free cash flow allows a company to pay debt, pay dividends, buy back stock and facilitate the growth of business. Ideally, investors would like to see that the company can pay for its own operations and growth without relying on outside financing to do so.