====== Cash Flow Statement ======
The Cash Flow Statement (also known as the Statement of Cash Flows) is one of the three core financial documents that every publicly traded company must release, alongside the [[income statement]] and the [[balance sheet]]. Think of it as a company’s financial diary, but instead of tracking feelings, it tracks cold, hard cash. While the income statement tells you about a company’s //supposed// profitability using [[accrual accounting]] rules, it can include non-cash revenues and expenses. The cash flow statement cuts through the noise. It shows precisely where a company's cash came from and where it went over a specific period (usually a quarter or a year). For [[value investing]] purists, this statement is often considered the most important of all, because as the saying goes, "revenue is vanity, profit is sanity, but cash is reality." A company can report a huge profit but go bankrupt if it doesn't have the cash to pay its bills. This statement reveals the truth.
===== The Three Musketeers of Cash Flow =====
The story of a company's cash is told in three distinct acts. Understanding these sections helps you see the complete picture of how a company is managing its money.
==== Cash Flow from Operating Activities (CFO) ====
This is the heart and soul of the business. CFO represents the cash generated from a company's normal, day-to-day business operations—the very reason it exists. For a bakery, this is the cash from selling bread and pastries, minus the cash paid for flour, sugar, and employee wages. A positive and growing CFO is the sign of a healthy, sustainable business. It's the engine that powers everything else.
Most companies use the //indirect method// to calculate CFO. They start with [[net income]] (from the income statement) and then make two main adjustments:
  * Add back non-cash expenses like [[depreciation]] and [[amortization]]. These were subtracted to calculate profit but didn't actually involve a cash payment.
  * Adjust for changes in [[working capital]]. For example, if a company's customers are taking longer to pay their bills, its cash will decrease even if its reported sales are high.
==== Cash Flow from Investing Activities (CFI) ====
This section is all about the company's long-term investment decisions. It shows how much cash the company is spending to grow and maintain its operations. Common activities here include:
  * **Cash Outflows:** Buying [[property, plant, and equipment (PP&E)]], purchasing other businesses ([[acquisitions]]), or buying investment securities. This is often referred to as [[capital expenditure (CapEx)]].
  * **Cash Inflows:** Selling off assets, such as old equipment or a factory.
Don't be alarmed by a negative number here. A large negative CFI often means the company is investing heavily in its future growth, which is exactly what you want to see in a healthy, expanding business. A consistently positive CFI, however, could be a red flag that the company is selling off its core assets to stay afloat.
==== Cash Flow from Financing Activities (CFF) ====
This part of the statement reveals how a company interacts with its owners and lenders. It details the flow of cash between the company and its financiers.
  * **Cash Inflows:** Raising money by issuing new [[stock]] or taking on [[debt]].
  * **Cash Outflows:** Repaying debt, paying [[dividends]] to shareholders, or conducting [[share buybacks]].
CFF tells you a story about a company’s financial strategy. Is it relying on debt to fund its operations? Is it rewarding shareholders with cash? A company consistently raising cash through financing while its operations (CFO) are burning cash is a major warning sign.
===== Why Value Investors Worship at the Altar of Cash Flow =====
For a value investor, the cash flow statement is a treasure map that can lead to undervalued gems and help avoid financial sinkholes.
==== Cutting Through the Accounting Fog ====
[[Earnings]] can be managed and massaged by clever accountants. Companies can use various techniques to make their profits look better than they really are. Cash, however, is much harder to fake. A dollar is a dollar. The cash flow statement provides a crucial reality check on the profitability reported in the income statement. If a company boasts high net income but has weak or negative cash flow from operations, something is fishy.
==== Uncovering the Real Profitability ====
The ultimate goal for many investors is to find companies that gush cash. The cash flow statement is the key to calculating one of the most powerful metrics in finance: [[Free Cash Flow (FCF)]]. While there are several ways to calculate it, a common method is:
//FCF = Cash Flow from Operations - Capital Expenditures//
FCF is the surplus cash a company generates after paying for its daily operations and reinvesting in its future. This is the cash that's truly //free// to be used to pay down debt, reward shareholders with dividends and buybacks, or stockpile for a rainy day. It's the bedrock of most modern valuation methods, like the [[discounted cash flow (DCF)]] model.
==== A Quick Health Check ====
By glancing at the cash flow statement, you can quickly assess a company's financial health. Ask yourself these simple questions:
  * Is the company generating consistent, positive cash from its core operations (CFO)?
  * Is the company investing for the future (negative CFI)?
  * How is the company funding itself? Is it through its own operations or by taking on heaps of debt (high CFF)?
  * Are its cash flows strong enough to support its dividend payments? If CFF shows a large outflow for dividends but CFO is weak, the dividend might be unsustainable.