Analyzing a Cash Flow Statement

Investors need to know the ins and outs of analyzing a cash flow statement to ensure that they make informed decisions that will benefit them in the long run. Although it can be difficult for a beginner to understand a cash flow statement, once you know what to look for, things begin to come together soon enough.

Simply put, cash flow is the fuel of any business. This is the best way to evaluate the overall financial health of any company, regardless of industry or age.

The main goal of any company is to be cash flow positive. This means that more money is coming in than going out. With this, a profit is guaranteed.

The first step in analyzing a cash flow statement is reviewing the operations section. This section shows the amount of money coming in and going out, as related to the main operation of the business.

As you move on, you will need to review the investing portion of the cash flow statement. This is the amount of money coming in and leaving as it is related to the purchase of equipment and supplies and, of course, to investments.

The last section of a cash flow statement details financing activities. For example, this portion of the statement will include information on any debt payments or dividends being paid out to investors. By properly examining this section, it is simple to see how the borrowing of money affects the company’s bottom line.

Where Is the Money Coming From?

Experienced investors can quickly look at a cash flow statement and find all the information needed to make an informed decision. One of the details that they look at, beyond the basics, is where the cash flow is coming from. In other words, they want to know the ins and outs of how the company is actually generating its money. If most of the money is coming from core operations, it usually means that the company is in good financial standing and in turn a sound investment. While there is nothing wrong with cash flow coming from investments and financing, it can be more difficult to analyze these numbers and determine what they mean now and the effect that they will have in the future.

Is Negative Cash Flow Always Bad?

As an investor, you are probably going to spend most of your time looking for companies that have a positive cash flow. Those with a negative cash flow are not necessarily bad investments, though. In some cases, a company may have a temporary negative cash flow due to large purchases being made at the same time.

When analyzing a cash flow statement, an investor should review the three major parts to gather more information on where the money is coming from, how much is being spent and where the company is headed. Investors who are skilled at analyzing cash flow statements generally make the best decisions.

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