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Few financial statements are as important as the statement of cash flow. While the income statement tells you a company's accounting-based profits and the balance sheet gives you a snapshot of a business's financial health, only the cash flow statement tells you what's happening with a business's cash, which is arguably the most important indicator of its performance.
One of the most crucial components of the cash flow statement is the net change in cash.
In this article, we'll discuss how to determine the net change in cash, examine why it's important, and answer some frequently asked questions on the net change in cash.
Calculating the net change in cash is relatively simple. You just need to add the following three or four entries together, which are found on the cash flow statement.
Effect of exchange rates on cash and cash equivalents if the company does business in the U.S.
Let's use a real-world example to make it easier, looking at fiscal 2023 for Apple (NASDAQ:AAPL).
The company started the year with $24.98 billion, generated $110.54 billion from operating activities and $3.71 billion from investing activities. It lost $108.49 billion in financing activities, primarily from share repurchases.
In total, Apple's cash balance increased by $5.76 billion, the difference between the gains from operating and investing activities, and the loss from financing activities. Apple finished the year with $30.7 billion in cash and cash equivalents.
The net change shows the difference in a company's cash balance over a given period, typically a full year or part of a year.
Understanding a company's cash balance and the change in it offers an important insight into the health of a business.
It's not essential that the cash balance grows, but you'll typically want to see an increase in operating cash flow. A business that is losing operating cash flow will have to raise money through debt or equity or sell assets if it doesn't have cash on its balance sheet.
A company losing money in operating cash flow is probably still in its early growth phase or in decline. If operating cash flow is negative and the overall net change in cash is also negative, the business could be headed toward bankruptcy.
However, you'll want to consider other factors, such as the overall cash and debt balance, operating income, and whether the business is growing or not.
Generating cash is a primary objective of any business, so it's essential for investors to understand a company's cash balance and how much cash the business is generating or losing.
Losing cash alone isn't necessarily a warning sign, but it should signal a need for more investigation to determine if the company is healthy.
If a company's operating cash flow is negative, its debt is high, and its revenue is falling, the business is likely in trouble.
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