The Cash Flow Statement shows the actual cash inflow and outflow of the company. I like to invest only in companies that have excellent cash flows: More money is coming in than is going out. There will be years when more money will go out than that come in -- when the company buys new capital assets (Equipment, Building and/or Plants). The one thing I avoid is a company that is always borrowing, even to pay dividends.
The Cash Flow Statement has 3 major categories:
- Cash Flow from Operating Activities: This is, perhaps, the most important category. It shows how much money was collected from the customers and how much was spent on the core business/operations. If a company is spending more on its operations than it's getting from Sales, then there's a big problem. And that's what I make sure is not happening in companies I'm considering for investment.
- Cash Flow from Investing Activities: This shows the cash generated by sale of company assets and cash spent on buying new assets. The net is usually negative, because companies spend more buying new assets than they gain from selling old assets (salvage value).
- Cash Flow from Financing Activities: This shows cash that came in through financing activities -- taking a loan from a bank, selling bonds, rights issue, e.t.c. And it shows cash that was spent on servicing loans, repaying loans and paying dividends.