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Firstly, Cash Flow from Operations.
Secondly, Cash Flow from Investments.
Lastly, Cash Flow from Financing Activities.
Cash Flow from Operations is an aggregate of Net Income and any depreciation or amortisation put back.
Depreciation and amortisation represent money which was spent years ago and must be added back to give us an accurate picture of the company's Cash Flow from Operations.
Here, not only do we want to see a positive cash flow, the higher the cash flow, the better.
Next, we examine Cash Flow from Investments.
Businesses make investments in income producing assets such as production equipment.
Any money spent making such investments are labelled Capital Expenditures (CAPEX).
It is also possible for companies to sell such investments and we might therefore get a positive figure under Others.
However, here, cash flow is usually a negative figure.
Companies which consistently have very high CAPEX should show that they are able to fund this through internal resources as far as possible and that they should be able to generate higher returns on such expenditures.
Lastly, we look at Cash Flow from Financing Activities.
Money used in the payment of dividends or in the buy back of shares results in negative cash flow.
Shareholders like dividend payouts. They also like to see the value of their shares rising which happens when a company does a share buy back.
So, negative cash flow here is actually good for shareholders.
Money gained from selling new shares or issuing bonds provides positive cash flow. Here, again, we get a bit of a twist.
The company might get positive cash flow through the issuance of new shares or bonds but it is actually bad for the shareholders as their shareholdings are diluted and bonds have to be repaid with interest.
Unless the company is able to demonstrate that it will be able to use the funds raised to increase value for its shareholders, it has to be looked at most cautiously.
This post ends the quick introduction to Fundamental Analysis which I set out to blog starting with The Income Statement and followed by the Balance Sheet.
I hope you have found these posts informative and if you are not already doing FA, I hope these have made you interested enough to look into the subject in greater detail.
I will be going away for a short holiday over the next few days with my family and will return mid week. I wish everyone the very best and I will talk to you again soon.
Related posts:
1. Fundamental Analysis: The Income Statement.
2. Fundamental Analysis: Balance Sheet.
3. Why is Warren Buffet the world's greatest money maker?
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