How do you analyze a company's statement of cash flows?

by roderick_marquardt , in category: Stocks and Equities , a year ago

How do you analyze a company's statement of cash flows?

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1 answer


by heather , 10 months ago


Analyzing a company's statement of cash flows involves several steps:

  1. Review the structure: Understand the different sections of the statement, including operating activities, investing activities, and financing activities. This will help you interpret the cash flows in each area.
  2. Assess operating cash flows: Evaluate the company's core operations by examining cash flows from operating activities. Look for trends and changes in cash flow from net income, as well as adjustments for non-cash expenses like depreciation and changes in working capital.
  3. Evaluate investing cash flows: Review how the company is investing its cash. Positive cash flows in this section indicate investments in assets like property, plant, and equipment, while negative cash flows suggest disposals or sales of assets. Evaluate if the investments are aligned with the company's strategy and growth plans.
  4. Analyze financing cash flows: Understand how the company is financing its operations. Positive cash flows here may indicate new debt or equity financing, while negative cash flows can signify debt repayments or dividend payments. Consider if the financing activities are sustainable and if the company is relying heavily on external funding.
  5. Calculate free cash flow: Assess the company's ability to generate free cash flow by deducting capital expenditures from cash flows from operating activities. Positive free cash flow indicates the company has surplus cash to invest, reduce debt, or distribute a**** shareholders.
  6. Compare with historical data and competitors: Analyze the statement of cash flows over multiple periods to observe trends. Compare the company's cash flow performance with its industry peers to gain insights into its financial health and efficiency.
  7. Identify potential red flags: Look for any significant changes or unusual items in the cash flows. For example, negative operating cash flow can be a warning sign of liquidity issues. Similarly, consider if the company's financing activities are excessively relying on debt or if dividend payments are disproportionate to cash flow.
  8. Consider the bigger picture: Finally, integrate the information from the statement of cash flows with other financial statements (such as the income statement and balance sheet) to get a holistic understanding of the company's financial performance and its ability to generate future cash flows.