Cash Flow Statement: An Essential Tool Every Investor Must Know

When it comes to financial analysis, most investors tend to focus primarily on the income statement. However, what is often overlooked is the cash flow statement, which is equally important or even more so because cash is the heartbeat that drives a company’s operations and indicates whether the company has enough cash reserves to continue its activities.

Cash Flow Statement and Other Financial Reports

In studying a company’s financial position, we encounter three main types of reports, each with different functions:

Balance Sheet (Balance Sheet) tells the story about assets, liabilities, and equity at a specific point in time. It is a static snapshot that shows “as of today” how much the company is worth.

Income Statement (Income Statement) presents operational results, whether annually, quarterly, or semi-annually, showing how much profit or loss the company has generated. This helps us see the company’s growth potential.

Cash Flow Statement is the part that reveals the truth directly: how much cash the company actually has, whether it is sufficient for ongoing operations. Cash is actual money in motion, unlike revenue recorded from receivables that haven’t been collected yet.

What Exactly Is the Cash Flow Statement?

Cash Flow Statement tracks the inflow and outflow of cash within the company. It shows:

• Where the cash came from
• How the cash was used
• Ultimately, how much cash remains

This change is divided into three channels, which are key to understanding the cash flow statement.

Understanding the 3 Types of Cash Flows

1. Operating Activities (Operating Activities)

This is the cash generated from core business operations, such as:

• Revenue from sales
• Commissions, royalties
• Production costs, taxes, operating expenses

This part is the most critical because it indicates whether the company’s cash truly comes from its business activities or from other sources.

2. Investing Activities (Investing Activities)

Cash related to the purchase or sale of long-term assets:

• Proceeds from selling land or securities
• Outflows for buying machinery, construction

3. Financing Activities (Financing Activities)

Cash related to borrowing and debt repayment:

• Funds from issuing bonds or loans
• Payments for debt repayment, share buybacks, redemption of securities

Real-Life Example: Microsoft

Let’s look at Microsoft’s cash flow from 2020 to 2023:

The company’s main cash inflow comes from ongoing operations, increasing from $60 billion to $87 billion in 2023. This is a good sign, indicating Microsoft is generating real income from its core business.

Regarding investments, the company spends about a quarter of its operating cash flow, which is balanced and does not negatively impact overall cash flow.

Interestingly, in terms of financing, Microsoft pays out $40-50 billion annually, mostly through Share Buyback. This doesn’t actually leave the company but creates value for remaining shareholders.

Ultimately, Microsoft has free cash flow between $50-60 billion, demonstrating a consistently strong financial position.

What Does a “Good” Cash Flow Statement Look Like?

Having a large cash reserve isn’t necessarily good, as it might mean missed opportunities to generate additional income. Conversely, negative cash flow isn’t always bad, especially if the company made significant investments that year. The key components to watch are:

For operating cash flow, ensure most of it is positive, indicating real business income. If it’s negative or mainly from other sources, be cautious—large positive cash flow might be a one-time event, such as asset sales.

For investing cash flow, negative figures often indicate growth investments in machinery, technology, and infrastructure, which is a good sign for long-term competitiveness.

For financing cash flow, consider the context. A positive number suggests the company is borrowing or raising capital, which incurs interest costs. A negative number indicates debt repayment, a sign of a healthy financial position.

How to Read a Cash Flow Statement

When reviewing a cash flow statement, ask yourself:

1. Where does the main cash come from—operations, investing, or financing?
2. If it mainly comes from operations, that’s a good sign.
3. If it comes from asset sales or borrowing, consider how sustainable that is.
4. Where is the cash used—investments or debt repayment?
5. After deducting expenses, how much cash remains? (Free Cash Flow)

Summary

The cash flow statement is often overlooked but is one of the most important tools for fundamental analysis. The final figure showing cash reserves isn’t the most critical variable; rather, each component reveals the true health of the company’s finances.

Investors who understand how to read the cash flow statement will gain deeper insight into the business and be able to make more confident investment decisions.