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How to Read the Cash Flow Statement

The cash flow statement shows the company's operating, financing and investing activities for a period. It shows investors exactly how a company generated its cash and how it was used. Cash flow assists investors in assessing the company's ability to generate cash internally, to repay debts, to reinvest and to pay dividends. The most conservative measure of a company's financial health, cash flow is much less vulnerable to manipulation than earnings.

The operating section shows how the company's basic business performed. Look for positive and growing cash from operations. Profits growing faster than cash from operations are a red flag for investors. The financing section shows if the company borrowed money, or if the company issued or repurchased shares. Repurchase of stock is generally positive; sales of stock are generally negative unless explained by rapid growth which requires additional equity capital. Repayment of debt is generally positive. A profitable company with low financial leverage taking on new debt may be positive. A highly leveraged company taking on more debt can be dangerous. The investing section highlights capital expenditures, purchase of investments and acquisitions in which the company has invested for the future. Large and growing capital expenditures means the company is investing significantly for the future. Foreign exchange rates have an impact on the net change in cash of companies with significant foreign holdings and export activities. This constitutes additional business risk. Beware of large changes in currency translation relative to net change in cash.

Look for companies with free cash flow, defined as EBITDA minus capital expenditures and dividend payments. Companies with free cash flow can finance growth and dividends from internal sources; companies with negative free cash flow may have to sell equity which will dilute investors' holdings, borrow money or sell assets.

Quarterly Cash Flow Statements are not available for U.S. companies.


Cash Flow Statement Definitions


Cash adjustments - Cash flow item for accounts not specifically identified as operating, investing or financing, for example foreign exchange adjustments and discontinued operations.

Cash flow (Cash flow from operations) - Income before extraordinary items plus non-cash items, such as equity income and depreciation, for continuing operations. It is important because it indicates the ability to pay its bills, finance growth and pay dividends.

Cash flow from operating activities - Operating activities usually involve determination (income statement, current assets and current liabilities) items.

Cash flow from financing activities - Financing activities involve cash flows generally resulting from changes in long-term financing and shareholders' equity items.

Cash flow from investing activities - Investing activities involve cash flows generally resulting from changes in long-term assets.

Cash flow per share - Cash flow from operations divided by common shares outstanding at end of indicated fiscal year. Helps determine the quality of earnings when compared to earnings per share.

Cash flow statement - A financial statement listing how a company has obtained its funds and how it has spent them over a period of time.

Change in non-cash working capital - Net change in current assets and current liabilities other than cash, for example accounts receivable and inventory.

Non-cash items - A cost, such as depreciation, depletion and amortization, that does not involve any cash outflow.

Other operating cash flow item - An operating cash flow account for activities not specifically identified as cash flow from operations or change in non-cash working capital. Includes cash flow from discontinued operations.

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