Along with the Balance Sheet and Income Statement, the Cash Flow Statement is one of the fundamental building blocks of financial analysis - worth familiarising yourself with it!
Now, we’re not saying you need to know all the accounting ins and outs here (boring 😴), but having a general sense of what a cash flow statement is, and why it’s important, will take you a long way! So without further ado…
What is a Cash Flow Statement?
Simply put: the cash flow statement provides information about all the actual cash which has moved through a company over a given time period - say over 3, 6 and/or 12 months. Similar to the income statement which also gives you a view of how a company performs over a given time period, but unlike the balance sheet, which is a view of the company at a specified date - like December 31st or June 30th for example.
The cash flow statement is usually presented in 3 sub-sections:
Cash flow from operating activities
This is a summary of all the cash the company has (hopefully!) raked in via its usual operating activities 💸💸💸 - similar to the "net income” you find in income statements, with a few changes!
Cash flow from investing activities
This is a summary of all the cash the company has paid / received from buying / selling any assets throughout a given time period
This would include any tangible assets (e.g. office buildings, machinery, equipment, etc.) and intangible assets (e.g. media content rights, software licensing rights, brand acquisitions, etc.)
Cash flow from financing activities
This is a summary of all the cash the company has paid / received from raising / paying down any equity or debt financing from the capital markets (as well as fees paid out to the company’s bankers, lawyers and accountants for helping to facilitate the financings!)
The net change in all of the above 3 sub-sections over a given time period either increases or decreases a company’s cash balance - which is also reflected in its balance sheet.
Why is it important?
The cash flow statement is a handy way of checking how much money a company is actually earning / investing / borrowing - an insight into the what’s driving company’s “bank balance” higher / lower. This might give you a sense of what forecast future cash balances will be like by estimating how much the company might make / pay out from operating, investing and financing activities!
The cash flow statement is most useful when looking at a company’s free cash flow for valuation purposes (perhaps you think the most relevant valuation metric for a specific company is its Price to free-cash-flow ratio, or perhaps you want to value a company using a free cash flow discount + WACC model). In some special cases, it’s also worth looking at this statement if you suspect a company is close to becoming illiquid / running out of cash and having to shut its doors - yikes!
What does this look like in practice?
Let’s take a look at pages 42 & 43 😰 of Netflix's 2018 annual earnings report. Just kidding 😉 - we’ve simplified it for you below 🙏🏼:
2018 Netflix Cash Flow Statement beginning and end balances (in $ billions 💵💵💵)
Beginning of year cash balance: $2.8bn
Net change in cash: $0.99bn - the cash flow statement essentially gives you a detailed breakdown of where exactly all of this $0.99bn 💵💵💵 came from!
End of year cash balance: $3.8bn
The beginning and end of year cash balances are reflected under the “cash and cash equivalents” line on the balance sheet (see for yourself on page 43 of the report!)
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
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