In a company’s cash flow statement, you would be able to see the amount of cash flowing in and out of a company. Typically, cash flow statements consist of three sections:
- Cash Flow from Operations
- Cash Flow from Investments
- Cash Flow from Financing Activities
Cash Flow from Operations
Cash Flow from Operations is an accounting item that shows you the amount of cash that a company brings in from their business activities. This is cash flow from purely business activities, and does not include long-term capital or investments. Clearly, a positive cash flow is desired, and the higher the cash flow, the better.
Cash Flow from Investments
This shows the change in a company’s cash position resulting from any gains or losses from the company’s investments. Investments can be in the form of instruments in the financial markets, or investments in the company’s operating subsidiaries. Investments can also be in the company’s capital assets such as plants and equipment.
Sometimes, the value from Cash Flow from Investments may be negative, but this may be because of heavy investment expenditures. While this may affect their quarterly figures, it may not necessarily be a bad thing in the longer term.
Cash Flow from Financing Activities
In the section Cash Flow from Financing Activies, this shows the cash used in the payment of dividends to shareholders, or in the buy back of shares. Generally, shareholders like dividend payouts, and with share buy-backs done by the company, the value of their shares rise. So in this section, negative cash flow is actually a good thing for shareholders.
Conversely, a positive cash flow in this section is gained from the comapny selling new shares or issuing bonds. This is actually bad for the shareholders since their shareholdings are diluted, and bonds have to be repaid with interest. This is not always bad, but only if the company is able to demonstrate that the funds raised can increase value for its shareholders.
Category: Fundamental Analysis (FA)