Q. Can you explain what a company's statement of cash flows should tell me?
A. The cash flow statement shows how much money a company is really making as it works through operations, makes investments, and borrows money.
The statement breaks cash inflows and outflows into three categories: operations, investments, and financing. Some operating activities include purchases or sales of supplies, and changes in payments expected and payments due. Investing activities include the purchase or sale of equipment, buildings, property, companies, and securities such as stocks or bonds. Financing activities include issuing or repurchasing stock and issuing or reducing debt.
If the bottom-line number is positive, the company is "cash-flow positive." That's a good thing. But it's not the only thing you should look at on this statement. Check to see where most of the moolah is coming from. You'd rather see more greenbacks generated from operations than financing. Cash flow from operations is arguably the most important bottom line on this statement.
Also, examine the various line items to see how they have changed compared to past years. You may notice, for example, that "payments of debt" double or triple from one year to another. This shows the firm increasingly paying off debt. "Purchase of company stock" would reflect a company buying back some of its own shares, to increase the value of the remaining shares -- something shareholders generally smile at.
If you're thinking of investing in any company, the more you know about it, the better -- and scouring the cash flow statement can be a very profitable thing to do.
You can learn more about how to interpret financial statements in our "Crack the Code: Read Financial Statements Like a Pro" online seminar. Give our online seminars a whirl. More than 90% of those who've taken them have consistently given them high marks -- and besides, we offer a satisfaction guarantee, or your money back. What do you have to lose, except your fear of financial statements?
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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.
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