The last of the three financial statements that are reported by companies is the cash flow statement. Although some investors may only briefly scan through this aspect of the business, the cash flow statement can provide investors with lots of vital information about a company.
This is the third and final part of my series on financial statements. In the first article, I dealt with three key aspects of the balance sheet, while in the second, I looked at some essential numbers investors should follow from the income statement.
In this article, I will look at the key takeaways that we can gather from cash flow statements.
The Cash Flow Statement
The cash flow statement lists all cash inflows and outflows over the reporting period. This is divided into cash flows from operation, financing and investing.
Because most companies use accrual accounting systems, revenue published on income statements may not be recognised as cash until a later date. Therefore, there is a need for companies to report revenue and cash separately.
Is the Company Operating Cash Flow Positive?
Ever heard the phrase “cash is king”? Well, cash is vital in running any business. It is required to pay for the operational costs, expand the business through capital expenditure, pay dividends to shareholders and also to pay off any short-term debt incurred.
As such, investors should look out for companies that can consistently generate cash in its business. A company that has been burning money over the years and is unable to be cash flow positive should be a warning sign to investors.
Having said that, some companies that are fast growing like certain tech companies around the world may choose to spend exorbitantly in a bid to reach out to more customers and expand their market share. This may mean that despite many years of negative cash flow, they could be well placed for future growth.
Negative Cash Flow from Investing
When identifying companies that are catered for growth, it is useful to look out for companies that have net negative cash flow from investing. This means that is investing more in new assets to grow in the future, rather than divesting its assets for a quick profit.
Well-Managed Cash Flow from Financing
The financing section of the cash flow statement details the company’s cash flows from borrowing and paying off debt. The cash flows due to dividends and issuance of new stock are also recorded here.
When analysing this segment of the statement, investors need to ensure that the company is managing its borrowings, and issuance of dividends and new stock conservatively.
The Foolish Bottom Line
The cash flow statement may be the least scrutinised financial statement among the three. Yet, it provides investors with valuable information about the company’s cash position and cash management.
Hopefully, these three articles on what to look out for in financial statements can give new investors an idea of what to focus on when assessing a company.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.