How Profitable is a Cash Flow Statement?

The cash flow statement provides essential information pertaining to the aggregate cash inflow data of a company that is received from the current external investment sources and operations. This statement also comprises cash outflows that the company is paying for its business and investment activities.

Along with that, it also allows you to have an insight into the future Income requirements. For an analyst or an investor, this statement signifies the transactions ongoing throughout the company and the ones that lead to success.

Basically, you will find three major sections on a Cash Flow Statement, viz. Investing activities, operating activities, and financing activities. With this post, let’s find out more about this specific statement and how it can be advantageous for investment purposes.

How Does Cash Flow Statement Work?

Companies that sell or offer their stocks to the public are obligated to file financial statements and reports. Basically, the significant financial statements are the income statement and Balance Sheet. The cash flow statement is an essential document helping interested parties get an insight into every transaction that takes place throughout the company; thus, executing a successful cash flow analysis.

The Accounting department gets divided into two different sectors – cash and accrual. A majority of public sector companies use Accrual Accounting that delineates a difference between the company’s actual cash position and the income statement.

However, the cash flow statement is prepared by concentrating more on Cash Accounting. For investors and analysts, having a cash flow statement is critical, keeping in mind that even profitable companies may Fail drastically at managing their cash flow adequately.

Different Sections of Cash Flow Statements

Technically, when talking about the influx of money, there is an adequate cash flow format, and the statement can give you an idea from different sections, such as:

Cash Flow from Operating Activities

This is the first section that you will find on a cash flow statement. Generally, it comprises transactions from operational business actions, such as:

• Interest payments
• Receipts from the sale of services and goods
• income tax payments
• Salary and wages to employees
• Payments made to suppliers of services and goods
• Rent payments
• Any additional payments for smooth operations

From this section, you get to have an idea of outflows and inflows of cash from the primary activities of the company. Here, the Cash Flow from Operating Activities begins with net income and then merges with noncash items to cash items involved in these activities. Putting it in simple words, this section signifies the net income of the company in a cash form.

Investing Cash Flows

This one is the second section of the statement. Here, you will find the results of investment profits and losses. This section also comprises cash spent on equipment, plant, and property. Further, with this cash flow statement analysis, you can have a look at the Capital expenditure (Capex) changes in this section for better analyzation.

The increase in capex signifies a decrease in cash flow. However, it is not a negative Factor every time. In most scenarios, it may also depict that a company is investing in its future operations. Basically, a higher capex can also indicate the company’s growth.

Financing Cash Flows

Cash flows from financing turns out to be the last section of the statement. Here, you get the overview of cash that has been used in financing for a business. It assesses cash flow between a company and its creditors and owners. Normally, the source of this financing is either from equity or debt.

This section is used to analyze the amount that the company has used for paying share buybacks or dividends. Along with that, you can also figure out how the company has raised cash from its operational growth.

In this section, you will also find cash acquired or paid from fundraising, like debt, equity, or in the form of loans paid or taken. When the cash is positive in this section, it means that the company has more money inflow than outflow.

The Final Words

A cash flow statement is a valued measure of profitability, strength, and long-term overview of a company. It helps figure out whether the company has enough cash or liquidity to pay the expenses or not. For companies, the CFS also acts as a way to predict the future; thus, helpful enough in budgeting.

As far as investors are concerned, this statement helps to reflect the financial health of a company. After all, the more cash a company has, the better. However, even if you are a pro at reading this statement, you must ensure that you don’t turn out to be wrong in your judgement.