The cash flow statement reveals a lot about a business that you can't immediately find on the income statement or balance sheet. For example, many companies are profitable on the income statement, even though the cash flow statement reveals they're actually burning through cash in every quarter or year.
One metric many investors look to is the "net change in cash," or how much cash went into or out of the business in any time period. Calculating the net change in cash is as easy as adding and subtracting once you know where to look.
How to calculate the net change in cash
Calculating a company's net change in cash is as simple as finding three (sometimes four) entries on a cash flow statement.
The net change in cash is calculated with the following formula:
- Net cash provided by operating activities +
- Net cash used in investing activities +
- Net cash used in financing activities +
- Effect of exchange rates on cash and cash equivalents (if the company does business in other currencies).
I'll use a public company so that you can follow along with an available example. In this case, I'll use the cash flow statement for Wal-Mart's (NYSE: WMT) 2015 fiscal year, which you can download here. The cash flow statement appears on page 39.
Wal-Mart, and other public companies, make the information you need readily available. Here are the figures for each input:
- Net cash provided by operating activities: $28.564 billion
- Net cash used in investing activities: -$11.125 billion
- Net cash used in financing activities: -$15.071 billion
- Effect of exchange rates on cash and cash equivalents: -$0.514 billion
If we add these figures up, we get a net change in cash and cash equivalents of $1.854 billion during Wal-Mart's fiscal 2015 year. In other words, Wal-Mart ended 2015 with $1.854 billion more of cash on hand than it had at the beginning of the year.
What the net change in cash tells us
Taken by itself, net change in cash isn't particularly useful. That Wal-Mart had more cash at the end of 2015 than at the beginning of 2015 means just that -- it had more cash. Each input to our calculation can tell us much more about what the company is doing.
Net cash provided by operating activities of $28.564 billion tells us that, through the normal course of business, Wal-Mart generated nearly $29 billion in cash by buying stuff, selling stuff, and paying for operating expenses like labor and cash taxes on profits.
Net cash from investing activities of -$11.125 billion tells us that Wal-Mart made more than $11 billion in capital investments into its business during its 2015 fiscal year. By definition, cash used in investing activities is cash that Wal-Mart spent on investments that have a useful life of more than one year. In retail, that would be things such as new stores, cash registers, computer systems, trucks to move inventory, and so on.
Net cash used in financing activities of -$15.071 billion tells us that Wal-Mart used cash to pay interest on debt, pay down debt, and pay dividends to investors, among other finance-related uses of cash. We can see from the cash flow statement that Wal-Mart used $6.288 billion of cash to pay down short-term debt during the year, while taking in $5.174 billion of cash by borrowing more with long-term debt. In addition, it paid dividends and bought back stock, using more than $7 billion of cash to do so.
Ultimately, it all comes down to context. For new and growing companies that are making big investments in their future, the net change in cash will be very helpful in understanding the company's available liquidity and its ability to continue to make new investments. For older, more established firms with strong profitability and access to financing, it's simply less important. Knowing your way around a cash flow statement, however, is something that has tremendous use for investors. At the end of the day, it's the business's ability to generate cash that matters most.
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