There are three main financial statements that each investor should be familiar with. Many of us have at least a passing familiarity with the balance sheet and income statements -- it's the statement of cash flows that's least understood. That's a shame, too, since it's a very informative statement.
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.
Examine the various line items, though, and see how they have changed compared with 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.
To learn more about investing Foolishly, visit our Fool School and our Investing Basics area. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees). You can also learn all about brokerages and find one that's right for you in our Broker Center.
More from The Motley Fool
What's the Deadline to File Taxes in 2018?
Here's when your 2017 return is due. Pay attention!
What Will Strong Nerf Sales on Amazon Mean for Hasbro?
Amazon said Hasbro's Nerf N-Strike Elite Strongarm Blaster was the best-selling toy on Amazon over the holidays. That won't necessarily translate to a blockbuster quarter for the toymaker.
Are Strong Sales of Robotic Vacuums on Amazon Good News for iRobot?
Robotic vacuums were among the best-selling home items on Amazon over the holidays. Will that translate into strong results for iRobot?