A cash flow statement shows how a company is paying for its operations and future growth by detailing how cash “flows” back and forth from a company. No business can survive for long without generating positive cash flow per share for its shareholders. As such, a company’s long-term cash inflows need to exceed its long-term cash outflows.
Often, cash flow statements are divided into three main parts: Operating activities reconciles the net income with the actual cash the company received from or used in its operating activities. Investing activities shows the cash flow from all investing activities, which generally include purchases or sales of long-term assets. And finally, financing activities includes cash raised by selling stocks and bonds, borrowing from banks, as well as stock buybacks or paying back bank loans.
Cash flow is one of the big items that I dig into when recommending individual stocks. When you combine strong cash flow with solid sales and earnings growth, you have the beginnings of a solid company.
Now, it’s important to note that just because a company is bringing in cash, it doesn’t mean that it’s profitable—and vice versa—but as long as you have a good handle on all three of these aspects of a financial statement, you should be well on your way to understanding the nitty-gritty of a company.