Earnings are an opinion, cash flow is a fact.
The Cash Flow Statement is by far the most important financial statement in an annual report.
Knowing how to read a Cash Flow Statement is crucial. Here's how:
The Cash Flow Statement is by far the most important financial statement in an annual report.
Knowing how to read a Cash Flow Statement is crucial. Here's how:
The cash flow statement shows how much cash goes in and out a company over a certain period.
You want to invest in companies that make money and manage their cash position well.
You want to invest in companies that make money and manage their cash position well.
A Cash Flow statement consists of 3 parts:
1️⃣ Cash Flow from Operating Activities
2️⃣ Cash Flow from Investing Activities
3️⃣ Cash Flow from Financing Activities
1️⃣ Cash Flow from Operating Activities
2️⃣ Cash Flow from Investing Activities
3️⃣ Cash Flow from Financing Activities
1️⃣ Cash Flow from Operating Activities
This section shows all cash the company generated from its normal business activities (selling its products/services).
This metric is comparable to net income, but in actual cash.
This section shows all cash the company generated from its normal business activities (selling its products/services).
This metric is comparable to net income, but in actual cash.
Questions to ask yourself:
1️⃣ Is the company profitable (positive operating CF)?
2️⃣ How robust is the operating CF (not too volatile)?
3️⃣ Does the operating CF grow attractively over time (> 7%)?
1️⃣ Is the company profitable (positive operating CF)?
2️⃣ How robust is the operating CF (not too volatile)?
3️⃣ Does the operating CF grow attractively over time (> 7%)?
2️⃣ Cash Flow from Investing Activities
Cash flows from Investing shows the cash in- and outflows from the investments the company made.
It consists of 3 major parts:
- Purchase/Sale of LT assets (CAPEX)
- Mergers & Acquisitions
Cash flows from Investing shows the cash in- and outflows from the investments the company made.
It consists of 3 major parts:
- Purchase/Sale of LT assets (CAPEX)
- Mergers & Acquisitions
Questions to ask yourself:
1️⃣ How capital intensive is the company (CAPEX)?
2️⃣ Is M&A important for the company?
3️⃣ Does the company invest a lot in other marketable securities?
1️⃣ How capital intensive is the company (CAPEX)?
2️⃣ Is M&A important for the company?
3️⃣ Does the company invest a lot in other marketable securities?
Now we can calculate the free cash flow.
Free cash flow is one of THE most important financial metrics.
Free cash flow = cash flow from operating activities - CAPEX.
Want to learn more about free cash flow? Take a look here:
Free cash flow is one of THE most important financial metrics.
Free cash flow = cash flow from operating activities - CAPEX.
Want to learn more about free cash flow? Take a look here:
3️⃣ Cash Flow from Financing Activities
The Cash Flow from Financing Activities shows how much cash the company needs to finance its business.
It shows the cash used to fund its operations and payback shareholders and creditors.
The Cash Flow from Financing Activities shows how much cash the company needs to finance its business.
It shows the cash used to fund its operations and payback shareholders and creditors.
Questions to ask yourself:
1️⃣ Does the company mainly use equity or debt to finance itself?
2️⃣ How much dividends does the company pay?
3️⃣ Does the company issue equity or debt regularly?
1️⃣ Does the company mainly use equity or debt to finance itself?
2️⃣ How much dividends does the company pay?
3️⃣ Does the company issue equity or debt regularly?
Finally, you can measure the net change in cash during the period.
You calculate this by adding up all cash flows:
Net change in cash = CF from Operating Activities + CF from Investing Activities + CF from Financing Activities
You want this number to be positive.
You calculate this by adding up all cash flows:
Net change in cash = CF from Operating Activities + CF from Investing Activities + CF from Financing Activities
You want this number to be positive.
That's it for today.
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If you liked this, you'll LOVE my free Financial Analysis course.
Grab it here: compounding-quality.ck.page
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