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What is a Cash Flow Statement? A cash flow statement details a company's cash inflows and outflows from operations, investments, and financing over a period. It measures how well a company generates cash to pay its debt, fund its operations, and support its growth.
1. Segments Breakdown A) Operating Activities -
Cash Inflows: Include net income, changes in working capital, and non-cash adjustments.
-
Cash Outflows: Include payments to suppliers, salaries, and operating expenses.
Formula: Operating Cash Flow = Net Income + Non-Cash Charges + Δ in Working Capital Example (Cable Factory): - Net Income = $100,000
- Non-Cash Charges (Depreciation) = $10,000
- Change in Working Capital = +$5,000
→ Operating Cash Flow = 100,000 + 10,000 + 5,000 =
$115,000
B) Investing Activities -
Cash Inflows: Include the sale of property, plant, and equipment (PPE) or investments.
-
Cash Outflows: Include purchases of new equipment, buildings, and R&D costs.
Formula: Investing Cash Flow = Proceeds from Sale of Investments – Capex – Acquisitions Example (Cable Factory): - Proceeds from Equipment Sale = $5,000
- Capital Expenditures (Capex) = $20,000
- Acquisition Cost = $0
→ Investing Cash Flow = 5,000 – 20,000 – 0 =
-$15,000
C) Financing Activities -
Cash Inflows: Include issuing new debt or equity.
-
Cash Outflows: Include paying dividends, repaying debt, or repurchasing stock.
Formula: Financing Cash Flow = + Proceeds from Debt/Equity – Debt Repayment – Dividends – Stock Repurchase Example (Cable Factory): - Proceeds from Debt Issuance = $50,000
- Debt Repayment = $10,000
- Dividend Payment = $5,000
- Stock Repurchase = $2,000
→ Financing Cash Flow = 50,000 – 10,000 – 5,000 – 2,000 =
$33,000
D) Total Cash Flow Calculation Formula: Net Cash Flow = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow Example (Cable Factory): - Operating Cash Flow = $115,000
- Investing Cash Flow = -$15,000
- Financing Cash Flow = $33,000
→ Net Cash Flow = 115,000 + (-15,000) + 33,000 =
$133,000
E) Cash at Beginning and End of Period Formula: Ending Cash = Beginning Cash + Net Cash Flow Example: - Beginning Cash = $50,000
- Net Cash Flow = $133,000
→ Ending Cash = 50,000 + 133,000 =
$183,000
2. Cash Flow Ratios A) Liquidity 1.
Operating Cash Flow Ratio Formula: Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities Example: - Operating Cash Flow = $115,000
- Current Liabilities = $50,000
→ Operating Cash Flow Ratio = 115,000 ÷ 50,000 =
2.3 2.
Cash Ratio Formula: Cash Ratio = Cash Balance / Current Liabilities Example: - Cash Balance = $183,000
- Current Liabilities = $50,000
→ Cash Ratio = 183,000 ÷ 50,000 =
3.66
B) Valuation 1.
Cash Flow Yield Formula: Cash Flow Yield = Operating Cash Flow / Market Cap Example: - Operating Cash Flow = $115,000
- Market Cap = $500,000
→ Cash Flow Yield = 115,000 ÷ 500,000 =
23%
C) Cash Conversion 1.
Free Cash Flow Conversion Formula: Free Cash Flow Conversion = Free Cash Flow / Net Income Example: - Free Cash Flow = $95,000 (Operating Cash Flow – Capex)
- Net Income = $100,000
→ Free Cash Flow Conversion = 95,000 ÷ 100,000 =
95%
3. Summary Example (Cable Factory) | Category | Amount ($) |
| Operating Cash Flow | 115,000 |
| Investing Cash Flow | -15,000 |
| Financing Cash Flow | 33,000 |
| Net Cash Flow | 133,000 |
| Beginning Cash | 50,000 |
| Ending Cash | 183,000 |
| Operating Cash Flow Ratio | 2.3 |
| Cash Ratio | 3.66 |
| Cash Flow Yield | 23% |
| Free Cash Flow Conversion | 95% |
Practical Insight: - A positive Operating Cash Flow indicates the business is generating enough cash from operations.
- A negative Investing Cash Flow means the business is actively investing in growth.
- A positive Financing Cash Flow shows the company is raising funds, but consistent negative financing cash flow due to dividend payments can strain liquidity.
- High Cash Flow Ratios suggest strong liquidity and financial health.