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Analysing the cash-flow statement

Morningstar  |  10 Dec 2012Text size  Decrease  Increase  |  
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The following article is part of an ongoing educational series. The previous article can be found here.


The cash-flow statement is the final point in the triangular series of financial accounts in every annual report. This is where you find out where the company's money came from and where it went.

A quick scan of the cash-flow statement provides a picture of how effectively a company is managing its short-term financial situation. It can also offer important alerts to problems that may be developing.

The statement is divided into three sections:

1. Cash flows from operating activities

This reflects money coming into and leaving the business associated with the ordinary company activities. It includes things like receipts from customers, dividends received, payments to suppliers and employees, and tax and interest payments.

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This is the most important section of the cash-flow statement because it reflects the underlying health of the business.

It's always a good idea to check that cash receipts are similar to revenues reported in the profit and loss account, to confirm that the revenues reflect "real life" instead of complex invoicing procedures or other distractions.

It's also worth reconciling reported cash flow with how the company is managing its short-term obligations, which was discussed earlier in this educational series.

Cash flow may appear artificially strong if a company is getting money in the door quickly but delaying payment to its own suppliers, or running down its inventories. Warning bells again!

2. Cash flows from investing activities

This reflects money coming into and leaving the business associated with investment activities. Things like: buying and selling property, plant and equipment, shares, businesses and brand names, and loan repayments.

Some companies have to pay more than others simply to generate business, and this can vary at different stages of their lives. These figures can therefore help you to understand the level of ongoing investment a company needs to make just to keep operating at current capacity.

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