Understanding the Cash Flow Statement(Cash Flow Statement) for Investors

Why Cash is More Important Than Profit

Many investors believe that the income statement is the most important report, but what they overlook is the (Cash Flow Statement) — the numbers that “really buy water, food” in practice.

The profit reported by a company may be just a number on paper, but cash is the blood of the business. If a company doesn’t have enough cash inflow, even the most profitable company can fail.

The cash flow statement thus plays a different storytelling role from other financial statements. It shows:

• Where does the company get cash from
• What does it spend cash on
• How much cash remains at the end of the period

The Difference Between the Three Main Financial Statements

In fundamental analysis (Fundamental Analysis), investors need to read three financial reports, each providing a different picture:

Balance Sheet (Balance Sheet) captures the company’s status at a specific point in time, including assets, liabilities, and equity. It’s like taking a snapshot of the company “at a certain moment,” showing total assets on that day.

Income Statement (Income Statement) shows performance over a period, such as annually, quarterly, or semi-annually. It indicates how much revenue was earned, costs incurred, and whether there was a (profit) or (loss), serving as an indicator of the company’s ability to generate profit.

Cash Flow Statement (Cash Flow Statement) records actual cash inflows and outflows. Often, a company reports profit on the income statement, but actual cash may not have yet come in ###for example, customers still owe money( or cash has been spent on major investments.

The Structure of the Cash Flow Statement Comprises Three Sections

) 1. Operating Cash Flow ###Operating Cash Flow(

This is the core part of the cash flow statement, showing cash received and paid from normal business operations:

Cash Inflows:

• Sales of goods/services
• Commissions, royalties
• Advance payments from customers

Cash Outflows:

• Purchase of raw materials, inventory
• Employee wages
• Electricity, rent
• Taxes, other expenses

If operating cash flow is negative or low, investors should remind themselves that the company might have trouble collecting from customers or controlling expenses.

) 2. Investing Cash Flow (Investing Cash Flow)

This section shows cash related to buying and selling long-term assets:

Cash Inflows:

• Sale of land, buildings
• Sale of securities ###stocks or bonds(
• Sale of other assets

Cash Outflows:

• Purchase of machinery, equipment
• Purchase of land, constructions
• Investments in real estate, other companies’ shares

Here, the importance of differentiation is clear: if Investing Cash Flow is heavily negative, it may indicate the company is growing and investing continuously for the future. Conversely, if it’s highly positive, it might mean the company is divesting or selling assets.

) 3. Financing Cash Flow (Financing Cash Flow)

This section indicates how the company raises capital and repays debts:

Cash Inflows:

• Issuance of debt (loans, bonds)
• Issuance of new shares
• Borrowing from banks

Cash Outflows:

• Repayment of loans
• Payment of dividends
• Share buybacks
• Bond redemptions

If the company consistently shows negative Financing Cash Flow, it indicates it is paying down debt and not borrowing more, which is a good sign.

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

This requires caution because many think “more cash = good,” but the reality is more complex:

Positive signals:

• Operating cash flow increasing year over year → the company truly generates cash from its core business
• Free Cash Flow (OCF - CapEx) positive → cash remaining after investments
• Negative cash flow from financing → the company is paying off debt

Warning signs:

• Operating cash flow negative but profit reported → numbers on paper only
• Continuous positive Financing Cash Flow → the company might need to keep borrowing
• Selling many assets ###Investing CF positive( → one-time income, not sustainable

How to Deeply Analyze the Cash Flow Statement

) Step 1: Look at Operating Cash Flow

This is the first indicator. If Operating CF (is low or negative), the remaining figures are less meaningful.

Investors should ask:

• Why is cash flow low? Because sales are low or customers are overdue?
• Are accounts receivable increasing? ###Check if goods/services are still receivable(

) Step 2: Look at Investing Cash Flow

Don’t judge solely by the numbers:

• Large negative = heavy investments (Could be good or risky)
• Large positive = asset sales ###Could be restructuring or temporary gains$60

Context matters: is the business growing or shrinking?

$87 Step 3: Look at Financing Cash Flow

• If Financing CF is negative year after year = the company doesn’t need to borrow, even if cash remains low
• If Financing CF is positive continuously = check whether Operating CF can support this

Real Company Example: Microsoft

Let’s examine Microsoft from 2020-2023 to see a good pattern:

Microsoft has strong Operating Cash Flow, starting at (billion dollars and increasing to )billion in 2023. This shows revenue genuinely comes from business operations.

The company also invests steadily (Investing CF negative), about 1/4 of Operating Cash Flow, which is acceptable for a mature company.

An interesting point is Microsoft’s consistent share buybacks ($40-50 billion), reflecting management’s confidence and returning value to shareholders.

Finally, Microsoft’s Free Cash Flow (Operating CF minus CapEx) remains at $50-60 billion, demonstrating the company’s strong financial capacity.

Having a lot of cash doesn’t always mean it’s good

This is a common misconception among beginners. Companies with very high cash reserves might indicate:

• The company is saving money (which doesn’t generate value)
• Lack of good investment opportunities
• Inefficient use of capital

Conversely, companies with low cash might show:

• Full utilization of capital for growth
• Continuous outflows for long-term investments
• Effective cash management

Summary

The cash flow statement Cash Flow Statement is not just a report to read at the last line and draw conclusions. True analysis involves deep understanding of all three sections:

1. Operating CF = Is the company generating real cash?
2. Investing CF = Is the company investing for the future or exiting the business?
3. Financing CF = Is the company a creditor or borrower?

By combining cash flow analysis with the balance sheet and income statement, investors can truly assess a company’s fundamentals and make informed investment decisions.

Other examples to study: [What are current assets and what do they include?] [What is EBITDA?]