What is a cash flow statement?？

Cash Flow Statement (Cash Flow Statement) is used to observe the actual inflow and outflow of cash in a company over a given period of time, thus reflecting the company's ability to continue as a going concern and whether there is a risk of failure.

"A / R & A" vs "Paid-in"

Both the income statement and the balance sheet are recorded in accordance with accounting standards and, as a result, non-cash transactions such as "receivables, payables, depreciation and amortization" are often recorded.。

In other words, if you look only at the income statement and balance sheet, these non-cash items may show you the amount on the books, but the company's money does not necessarily change with it, because the cash flow statement uses a "pay-as-you-go and pay-as-you-go system" that really captures the real change in real cash within a company.。

Depreciation and Amortization

For example, according to accounting standards, a company's assets are expunged proportionately from year to year, a process called depreciation; amortization is a method used to deduct the value of intangible assets over their lives.。

Therefore, if we want to get the company's real cash flow, then the cash flow statement can come in handy, because in the cash flow statement, in order to show the company's actual cash holdings, this deduction for accounting standards, will be "made back."。

Accounts receivable and payable

When a company makes a transaction, regardless of whether the money is actually received or paid at the moment, under accounting standards, the company must record the transaction in the income statement。

However, we know that both the buyer and the seller are likely to be in arrears, so from the cash flow statement, you can really see if the money has been received or paid during this period of time.。

This, in turn, allows investors and entrepreneurs to better understand the company's cash strength to better determine investment and business strategies。

Basic structure of cash flow statement

The statement of cash flows consists of three main items, namely.

• Cash Flows from Operating Activities: Cash generated or spent in the course of a company's operations
• Cash Flows from Investing Activities (Cash Flows from Investing Activities): The flow of money when a company makes investments and purchases physical assets.
• Cash Flows from Financing Activities (Cash Flows from Financing Activities): Changes in cash when a company's debt, equity and dividends are involved.

Operating Cash Flow（Cash Flows from Operating Activities）

Operating cash flow is the first cash flow in the statement of cash flows, primarily to restore the true flow of cash in the production and marketing of a company's products or services。

In other words, the amount of expenses in the income statement that are "not" really spent or the amount of income that is "not" really received is deducted.。At the same time, the operating cash flow will also be adjusted back to the non-cash items in the balance sheet.。

Operating cash flow is also a good way to check the company's operating performance to see if the business is earning sufficient cash flow and is sufficient to sustain future growth。The following are common items in operating cash flow:

• Net Income

The net profit item in the income statement reflects the company's ability to make money, but always includes a lot of non-cash expenses or income.。

As a result, the first step in operating cash flow is usually to list the net profit, which is then supplemented and deducted from those non-cash expenses and revenues in order to obtain the exact cash flow earned by the business.。

• Depreciation and Amortization

Depreciation refers to the fact that the company's assets will reduce part of their value proportionately from year to year; amortization is the method used to deduct the value of intangible assets over their lives.。

In addition to depreciation and amortization, there can be many other non-cash items that appear in each public company's income statement, such as deferred income tax benefits (Deferred Income Tax Benefit).。

• Changes in Operating Assets and Liabilities

This section primarily records current assets (Current Assets) and current liabilities (Current Liabilities) in the balance sheet, with non-actual cash change adjustments。

In addition to receivables and payables, other common ones are inventories (Inventories)。When inventory increases, it means that the company buys goods with cash and holds less cash, so it needs to be deducted from operating cash flow, and vice versa。

• Cash Generated by Operating Activities

Add and subtract the amounts in the previous steps to each other to calculate the company's net cash flow from operating activities.。Simply put, it's the money the company really makes from its business activities, or how much money it outflows。

• Summary

Therefore, a well-run company, operating cash flow should be positive, and there is no continuous increase year by year, can reflect the company's operations have no growth, can be used as a reference for investment decisions;。

In addition, if a company's operating cash flow performance in previous years has been positive and suddenly turns negative, special attention needs to be paid to carefully examining the company's fundamentals to find out why the operating cash flow is negative.。If it's just transient factors such as short-term increases in raw material prices that are okay, but if it's permanent shocks such as changes in government policy, then you need to consider them carefully.

Cash Flows from Investing Activities

Unlike operating cash flow, which focuses on the performance of earning power at a specific time, investing in cash flow in buying and selling items, which mainly involve the future of the company, such as the increase or decrease in the size of assets, can reflect the growth or contraction of the company's future operating strength.。

The following are common items in investing cash flows:

• Property, Plant and Equipment

The value in fixed assets (Fixed Assets) always increases when new assets are purchased, but the company's cash flow is actually deducted, so a deduction of this amount needs to be recorded in the investment cash flow。

If the asset is sold off, the value of the fixed asset will decrease, but the cash flow will be higher, so this cash needs to be made up in the investment cash flow.。

• Sale and purchase of securities (Securities)

The rationale is the same as for industry, plant and equipment, whether stocks, bonds, or other types of investment vehicles, which, if bought or sold, require a deduction or replacement of cash from the investment cash flow.。

• Cash Generated by Investing Activities

Adding and subtracting the cash flows from all investing activities to each other yields the net cash flows from investing activities。

• Summary

The key to investing cash flow is the buying and selling of assets, which shows whether the company is actively expanding, after all, the expansion of assets is directly related to whether the company can earn more revenue in the future.。

Therefore, when looking at this section, we focus on the industry, plant and equipment section; if it is negative, it means that the company is investing more in expansion and can expect the company to improve further in the future.。If it is positive, then we need to be careful about why the company is selling its assets and whether this will affect the company's operating performance。

Cash Flows from Financing Activities

Financing cash flow mainly records the cash flow related to the company's borrowing, debt repayment or dividend payment.。The following are common items:

• borrow money

Companies borrow money in a variety of ways, mainly in the form of money received from issuing new shares or bonds (Proceed from Issue of Stock / Bond) and bank loans.。Borrowing money means that the company's cash will increase, so these funds need to be added to the financing cash flow.。

• Debt repayment

Debt always comes due, so the company needs to repay the above debt, so the amount used to repay the debt needs to be deducted from the cash flow。

• Payment for Dividends

When a company pays dividends to shareholders, there is less cash on hand, so financing cash flows need to record this expense。

• Cash Generated by Financing Activities

The net cash flows from all financing activities are added and subtracted to arrive at the net cash flows from financing activities.。

• Summary

When the net cash flow of financing activities is positive, it means that the company has borrowed more money, and you can pay attention to whether the company will make any major moves in the near future.。

At the same time, a negative number means that the company pays its debts or pays more dividends, but a negative number is not a bad thing, which may mean that the company is becoming more and more financially strong and does not need to rely on external funds to support its operations.。

How to judge company performance？

Free Cash Flow

Free cash flow is money that a company can use freely, and in theory it is natural that the higher the better, meaning that the company can have more money to use after paying its debts。

Cash Flow Ratio (Cash Coverage Ratio)

The cash flow ratio shows the company's ability to repay its debts in the short term, and the higher the ratio, the more able it is to repay its debts in the short term, representing the income earned by the company's operating activities.。

There is no standard for cash flow ratios, and comparisons within the industry are only meaningful if they are to be compared。If it exceeds 100%, it means that the company makes money from its operations and can pay off its short-term debt。

Cash Flow per Share from Operations

Cash flow per share reflects operating cash flow per share, the higher the amount, the higher the company's ability to pay dividends。

SUMMARY

The cash flow statement can see a company's true financial situation and thus see if the company is actually making money or if it is just making money on its books.。It also allows us to see if the company can continue to operate, thus avoiding investing in companies that are at risk of bankruptcy.。