Cash Flow Statement records the overall movements of money in and out of a company.

When a company spends, cash goes out and comes in when it earns. It’s desirable to have more inflows than outflows.

People would invest in companies which have positive cashflows and are able to create more future cashflow streams.

All the publicly traded companies in Bhutan must publish financial report every year end.

A complete financial report must have all three parts; income statement, balance sheet, and cash flow statement.

I published posts on how to read the income statement and the balance sheet for deciding in which company to invest.

In this article, let us learn basics of reading the cash flow statement and how we can use it for better investing decisions.

What is a Cash Flow statement?

Cash flow statement is prepared to show how a company makes money and where it spends them.

It is through this statement that people know abilities of the company in the shareholders’ value creation.

We know the liquidity, operational optimization, long-term plans, working capital management, and financial viability out of it.

Reading a Cash Flow Statement

There are 3 sections in the cash flow statement. They are classifications of cash flows of the company:

1. Cash Flow from Operations
2. Cash Flow from Investing
3. Cash Flow from Financing

They’re presented in above order in the cash flow statement as well. Let us go through each one of them.

Cash Flow from Operations

This section gives money flows in line with the company’s core business operations – day-to-day business activities.

This section shall show if the company is able to generate enough funds to maintain its operations and plan for expansions.

It includes revenue, expenses, changes in working capital, and non-cash items like depreciation and amortization.

The ultimate figure this section provides must be positive and higher for future business expansions.

Cash Flow from Investing

This sections shows cash flows resulting from purchase or sale of long-term assets, such as property, equipment, or investments.

The ultimate figure from this section will be usually negative as most of the items will be capital expenditures (capex).

However, if the company sells off some long-term assets more than its capex for getting new ones, it will be positive.

The company having higher capex should prove they are able to fund it using internal resources and are able to get good returns.

Cash Flow from Financing

It records the cash flows resulting from financing activities and changes in the capital structure.

The dividend and share buybacks result in negative cash flow. But one is income for shareholders and other increases the share value.

Shareholders love both of them. So, the negative cash flow in this aspect is good for shareholders.

In contrast, issuing new shares or corporate bonds means positive cash flows but aren’t good for shareholders.

Things to look in this Statement

The company we are investing must grow. This means its cash flow from operations should not only be positive but increase every year.

If there are some unexpected deviations, we should look for reasons. It’s how we can know free cash flows, capital, cash flow ratios etc.

When the company has higher capex, look if they were able to bring more cash flows.

You should also look at the availability of funds when the company gives dividend or bonus issue or do buybacks.

In the similar manner, right issue or issuing bonds should be looked into seriously. They also impact value of your shares.

Basis of Your Investing Decision

We analyze cash flow statement to examine how the company is making money as well as using them.

If we can conclude it’s not only making increasing money but is also able to save protecting share values, we can invest.

Some companies will do monkey business within accounting framework to make it look better than they are. We must be cautious.

Who will invest in a company that doesn’t make enough money to survive but manipulates reports to appear itself good?

How do you use cash flow statement before investing in that company? Do you look other indicators? 

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