The cash flow statement is presented in the quarterly and annual company filings
Most people want to be an investor
But most investors don’t know how to read a cash flow statement
Here’s how to read a cash flow statement:
The cash flow statement is presented in the quarterly and annual company filings
-Is operating cash flow positive or negative? (Positive)
-Is capital expenditures less than OCF? (Yes)
-Is the company buying back stock or issuing new shares? (Buying back)
These are 3 simple questions to ask yourself before reading one
-Cash from operating activities
-Cash from investing activities
-Cash from financing activities
These are the 3 main components of every cash flow statement.
Cash flows from operating activities explains the cash flows within the business for its normal operations over a particular period.
This will show whether a company is capable of generating positive cash flow to maintain and grow its operations.
The most important thing when looking at operating activities is to make sure the number is positive.
If the number is positive this means it is generating more money than it’s spending for the normal operations.
If the number is negative this means the company could be in major long term trouble. They will most likely have to take on debt to fund their company.
If a company is taking on debt to fund their operations, they will not survive
Cash flows from investing activities comes from the profit and losses from investments that the company has made
Any long-term physical or intangible asset that the company expects to deliver value in the future will be included
Common line items in this section include:
-Purchase of Property, Plant, and Equipment (PP&E)
-Proceeds from disposal of PPE
-Proceeds from sell of stocks
-Acquisitions
Cash Flow from financing activities explains the cash flows used to fund the company’s operations and payback their shareholders along with creditors
Common line items include:
-Borrowing of long-term debt
-Repayment of Long-term debt
-Repayment of short-term debt
-Proceeds from stock options
-Proceeds from stock offering
-Repurchases of Common Stock
-Dividends Paid
The most important numbers you can gather from the cash flow statement is free cash flow
FCF tells investors and analysts how much cash a business generates after growing and maintaining it’s business
This cash can be paid to shareholders as a dividend, be used to pay down debt, buyback shares or to just keep as cash on balance sheet
This is a very important metric to gauge when valuing a stock
You should look for a company with FCF of 10%+
Learning how to read and analyze these are crucial when purchasing individual stocks
In closing, the cash flow statement shows how much cash different activities generate (or cost) a particular business over time
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