How to Analyze a Cash Flow Statement
The Cash Flow Statement (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. Cash is King! A company can show profits on the income statement but still go bankrupt if it runs out of cash.
Three Sections of Cash Flow
1. Cash Flow from Operations (CFO)
The cash generated from the company's core business activities. It starts with Net Income and adjusts for non-cash items (like depreciation) and changes in working capital. Positive and growing CFO is a sign of a healthy business.
2. Cash Flow from Investing (CFI)
Cash used for investing in assets, like buying equipment (Capital Expenditures or CapEx), or cash received from selling assets. Usually negative for growing companies as they invest in their future.
3. Cash Flow from Financing (CFF)
Cash flow related to debt and equity. Includes issuing or repaying debt, issuing shares, or paying dividends/buybacks.
Free Cash Flow (FCF)
This is one of the most important metrics for investors. It represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.
FCF can be used to pay dividends, buy back stock, pay down debt, or acquire other companies.