The cash flow statement is arguably the most underestimated of the three core financial statements. While the income statement shows profit and the balance sheet shows financial position, the cash flow statement reveals something even more critical: liquidity in motion.
What Is a Cash Flow Statement?
Operating Activities
Financing Activities
1. Cash Flow from Operating Activities
Typical line items include:
Depreciation & amortization (non-cash)
Key Insight: Positive operating cash flow is essential for survival. It means the company can fund operations without external help.
A profitable company with negative operating cash flow could be struggling to collect receivables or may be over-investing in inventory.
Tracks cash used in or generated from investment in long-term assets.
Purchase/sale of property, plant & equipment (capital expenditures)
Acquisitions of other companies
Example:
3. Cash Flow from Financing Activities
Includes:
Issuance or repayment of debt
Key Insight: Positive financing cash flow can reflect debt issuance or fundraising. Negative flow may suggest buybacks or debt repayment.
A mature dividend-paying company often shows consistent negative financing cash flow due to buybacks and dividends.
At the end of the statement:
Add this to beginning cash to get the ending cash balance, which links back to the balance sheet.
? Free Cash Flow (FCF)
This is a key measure of how much cash a company can generate after reinvesting in its business.
Negative FCF in growth firms is acceptable short term.
Some companies show strong net income but weak cash flow. This may signal:
Slow collections
? Quality of Earnings Check
Market Phase Interpretation
Investors tolerate negative free cash flow if reinvestment supports growth.
Operating cash flow becomes secondary to top-line and user growth.
Example: Startups like Palantir or Snowflake spending on expansion despite weak free cash flow.
Cash becomes king. Positive operating cash flow and FCF are highly prized.
Dividends and buybacks are scrutinized for sustainability.
Example: Utilities and consumer staples with predictable cash flows gain favor.
Mixed focus. Investors want to see improving cash metrics and evidence of CapEx translating into growth.
Key Ratios and Metrics
Free Cash Flow Yield=FCF / Market Cap
CapEx as % of Revenue
Positive net income but negative operating cash flow
Frequent reliance on financing to fund operations
Case Study: Comparing Two Firms
Operating CF: $5B
Financing CF: -$3B
Repays debt, returns capital, still grows. Ideal in bear or transition markets.
Operating CF: -$200M
Financing CF: +$1.5B
Funding expansion through equity/debt. Tolerated in bull phases but risky in downturns.
Study trends across multiple quarters or years
Understand the business model (CapEx-heavy vs. asset-light)
Final Thought
In frothy markets, investors may ignore cash shortfalls. But when sentiment turns, cash flow becomes the ultimate truth.
Great investors know: profits are optional, but cash is non-negotiable. Remember that and remember our new upcoming name as ForexLive.com evolves later this year to investingLive.com. Stay tuned!
This article was written by Itai Levitan at www.forexlive.com. Read More Details
Finally We wish PressBee provided you with enough information of ( Learn Investing: The Cash Flow Statement )
Also on site :