A cash flow statement tracks the inflow and outflow of cash, providing insights into a company’s financial health and operational efficiency.
The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. As one of the three main financial statements, the CFS complements the balance sheet and the income statement. In this article, we’ll show you how the CFS is structured and how you can use it when analyzing a company.
What Is Cash Flow?
Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company creates value for shareholders through its ability to generate positive cash flows and maximize long-term free cash flow (FCF). FCF is the cash from normal business operations after subtracting any money spent on capital expenditures (CapEx).
Cash Flow Statement
The cash flow statement acts as a corporate checkbook to reconcile a company’s balance sheet and income statement.1 The cash flow statement includes the “bottom line,” recorded as the net increase/decrease in cash and cash equivalents (CCE). The bottom line reports the overall change in the company’s cash and its equivalents over the last period. The difference between the current CCE and that of the previous year or the previous quarter should have the same number as the number at the bottom of the statement of cash flows.1
Below is Walmart’s cash flow statement for the fiscal year ending on Jan. 31, 2019. All amounts are in millions of U.S. dollars.2Investments in property, plant, and equipment (PP&E) and acquisitions of other businesses are accounted for in the cash flow from the investing activities section. Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flow from the financing activities section.
Walmart’s cash flow was positive, showing an increase of $742 million, which indicates that it has retained cash in the business and added to its reserves to handle short-term liabilities and fluctuations in the future.
How the Cash Flow Statement Is Used
The cash flow statement paints a picture as to how a company’s operations are running, where its money comes from, and how money is being spent. Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay down its debts. The CFS is equally important to investors because it tells them whether a company is on solid financial ground. As such, they can use the statement to make better, more informed decisions about their investments.
Types of Cash Flow
Cash Flows From Operations (CFO)- Cash flow from operations (CFO), or operating cash flow, describes money flows involved directly with the production and sale of goods from ordinary operations. CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses. Operating cash flow is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period. Operating cash flow is recorded on a company’s cash flow statement, indicates whether a company can generate enough cash flow to maintain and expand operations, and shows when a company may need external financing for capital expansion.3
Cash Flows From Investing (CFI)- Cash flow from investing (CFI) or investing cash flow reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of speculative assets, investments in securities, or sales of securities or assets.Negative cash flow from investing activities might be due to significant amounts of cash being invested in the company, such as research and development (R&D), and is not always a warning sign.1
Cash Flows From Financing (CFF)- Cash flows from financing (CFF), or financing cash flow, shows the net flows of cash used to fund the company and its capital. Financing activities include transactions involving issuing debt, equity, and paying dividends. Cash flow from financing activities provides investors insight into a company’s financial strength and how well its capital structure is managed
How to Analyze Cash Flows
- Free Cash Flow: FCF is a measure of financial performance and shows what money the company has left over to expand the business or return to shareholders after paying dividends, buying back stock, or paying off debt.3
- Unlevered Free Cash Flow: UFCF measures the gross FCF generated by a firm that excludes interest payments, and shows how much cash is available to the firm before financial obligations.3
- Operating Cash Flow: OCF is money generated by a company’s primary business operation.
- Cash Flow to Net Income Ratio: The ratio of a firm’s net cash flow and net income with an optimum goal of 1:1.
- Current Liability Coverage Ratio: This ratio determines the company’s ability to pay off its current liabilities with the cash flow from operations.
- Price to Money Flow Ratio: The operating money flow per share is divided by the stock price.
FAQs
What Is the Difference Between Cash Flow and Profit?
Cash flow isn’t the same as profit. Profit is specifically used to measure a company’s financial success or how much money it makes overall. This is the amount of money that is left after a company pays off all its obligations. Profit is found by subtracting a company’s expenses from its revenues.
What Is Free Cash Flow and Why Is It Important?
Free cash flow is left over after a company pays for its operating expenses and CapEx. It is the remaining money after items like payroll, rent, and taxes. Companies are free to use FCF as they please.
Do Companies Need to Report a Cash Flow Statement?
The cash flow statement complements the balance sheet and income statement and is part of a public company’s financial reporting requirements since 1987
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