Saturday, August 20, 2016

Basic Cocepts of Cash Flow

 Courtesy : Investopedia

Cash flow analysis is a critical process for both companies and investors. It's also a complex process that can leave the average investor with the feeling that delegating security analysis to a competent financial advisor just might be a good idea. If you aren't an accountant or a Chartered Financial Analyst, but you want to have a better understanding of what "cash flow from investing" means to business and investors alike, there are just a few basic concepts that you need to understand. 

Cash Flow Components

Corporate cash flow statements include three components:

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities
Cash flows from operating activities refers to money generated by a company's core business activities. This number highlights the firm's ability (or inability) to make a profit. While it provides good insight into whether or not the firm is making money, the other components of the cash flow statement also need to be taken into consideration in order to develop a more complete picture of the company's health.
Consider "cash flows from investing." Intuitively, cash flows from investing may sound like the amount of money a company generates from investments it has made, but the accountants who fill out corporate balance sheets are generally not referring to the number of shares of IBM the company has bought or the number of municipal bonds it has sold. Rather, from a corporate perspective, they are generally referring to money made or spent on long-term assets the company has purchased or sold. 

Upgrading equipment and buying another company to take over its operations and gain access to its clients and technology are investment activities from a corporation's point of view. Both of these activities cause companies to spend money, which is captured on a cash flow statement as negative cash flow. Similarly, if a company sells off old equipment or sells a division of its operations to another firm, these activities are also captured on paper as income from investing.
Cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Corporations often borrow money to fund their operations, acquire another company or make other major purchases. Timely operational expenditures, such as meeting payroll requirements, would be one reason for cash-flow financing. Companies are essentially borrowing from cash flows they expect to receive in the future by giving another company the rights to an agreed portion of their receivables. This allows companies to obtain financing today, rather than at some point in the future. 

What It Means to a Business

Cash flow is a key element of a successful business. Generating positive, sustainable cash flow is critical for a firm's long-term success. Keeping track of that cash flow is particularly important to business owners. The way that cash flow is captured and tracked plays a significant role in how businesses project their financial health to potential investors. A brief overview of cash and accrual accounting provides insight into the way accounting rules require companies to record revenues and expense.

For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.
Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue. 

What It Means to an Investor

Cash flow from operating activities is an important source of data for investors. Net income, depreciation and amortization, as well as changes in working capital, are included in this section of the corporate cash flow statement. The net number can be positive or negative.

As noted earlier, cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is servicing debt but can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.
While "negative" cash flow doesn't sound good, it isn't always bad - sometimes you've got to spend money to make money. Companies need to invest in their businesses in order to grow. Of course, red ink can't be the only color on the statement. Conversely, high cash flow doesn't mean the company is in good shape - it may just be selling off assets. Non-recurring revenues such as making $1 billion by selling off a division boost cash flow, but that division can't be sold again next year. When reviewing the numbers, it is critical that income generated by such non-recurring events as sale of fixed assets, securities, retirement of capital obligation or litigation be taken into proper consideration. Any or all of these numbers could represent a one-time profit or loss that would distort the firm's prospects if viewed as recurring items.

The Bottom Line
Clearly, cash flow analysis is complex, but a useful topic for investors when analyzing the health of a specific company. Just keep in mind that a company's cash flow statement is only one source of data providing insight into a firm's health. Think of it as a compressed version of the company's checkbook that includes a few other items that affect cash, like the financing section, which shows how much the company spent or collected from the repurchase or sale of stock, the amount of issuance or retirement of debt and the amount the company paid out in dividends. Other important sources of information include a firm's balance sheet and income statement. Be sure to conduct a thorough review of all relevant data before making an investment decision. If you have any doubts about your ability to sort through the numbers and make a good decision, there are plenty of professionals available to provide assistance with your stock selection needs.


  1. Due to some unavoidable reasons, not in a position to reply for your queries at present. Sorry for the inconvenience , will continue in a few days.

  2. Very informative topic vp sir. Leart a lot about fundamental analysis from you. Thank you very much.

  3. Sir Would Like To Know Your Your Views on Your Past Recommendation POLYPLEX CORP. Last 2 Quarters Result have been a complete Turnaround. Any Views? Thank You!

  4. Pls.share your view on earlier suggested Sunil Hitech Engineer.Will stock split be favorable for the company ?

  5. Sir, request ur inputs on V2Retail Results

  6. Gud Evening Sir. Hope you are fine and doing great sir.
    Sir kindly comment your valuable views for Shirpur Gold Refinery and Shilpi Cable Technologies.
    Will wait for your valuable feedback on it sir. Thanks.

    1. Awaiting for your reply VP Sir on the above mentioned script. Kindly do share your valuable comment on the same Sir. As i am a strict follower of ur blog since 2012. So please do the needful sir. Thanks.

  7. Hope everything is alright on your health front sir. Take care

  8. U r views on tata chemical, tata global bravrage

  9. Really sir heads off to you .... we dont know wht reasons are thr bt god will always with you you really a great human being god bless you always ...

  10. Thank you for keep on educating us and this article. We will hear from you soon. Take care!

  11. Sir
    Happy to see you..
    Hope everything is fine..

  12. Dear VP Sir, Hope you will be in best of health condition and everything else will be fine. looking forward to see you on board in few days only

  13. Hi Sir ur view on Pasupati Acrylon as it has come up with pretty good set of Numbers ,Salzer electronics & Tata Chemical as they have reduced debt after hiving off Urine business

  14. Hello sir, hope you are doing good, when are you back to value pick the stock, waiting since long for you :-) hope to see you back soon.

  15. Hi VP sir,

    I've followed many of your stock insights and analysis, and they have been extremely helpful in guiding novice investors about various aspects of stock selection. Please continue the service, if not completely, then in somewhat constrained manner, so that we can pick subtle clues from short analysis.
    As far as giving recommendations is considered,
    "Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations"

  16. Dear VP Sir,
    IL&FS engineering bags order, is it right time to enter again?

  17. VP Sir, do you track BCL industries & infrastructures?

  18. Dear Sir,
    Please suggest for your old recommandation i.e.Butterfly Gandhimathi & Alphageo.

  19. Sir how will you rate V2 Retail rssults

  20. sir please share your view on the future of jain irrigation.

  21. Hi VP sir , can you please reflect on the performances of the following companies:

    Ador welding
    Balaji amines
    Gujarat borosil
    Mic electronics

  22. Dear sir,
    Your views on IDFC bank please

  23. Dear VP ji
    Nowadays in most of the IPO subscription are taking place in a aggressive manner. Result during listing itself the scrip price huge increasing. As a retail investors its create confusion. Because for quality company IPO we have to subscribe or will wait for a good time to enter.
    Thank you.

  24. Sir - Hope all is well.
    Can you give your opinion on Cigniti Technologies?


  25. Hi VP Sir, Your views on Valiant communication after Q1 results. Do you expect it post profit in this financial year with the 24cr order book.

  26. Hi VP sir, your views on manpasand beverages.

  27. I was following Time Technoplast for a couple weeks and see that it has gave a good returns for investors and I see the packaging industry has a good steam left for the growth.

    Would like to know your views on this?

    This quarter it has better than average results and showing kind of signs for a positive growth.

  28. Sir,
    What happend to u hope all is well & you will continiue responding the messages sent by your follower

  29. Sir,
    i bought Welsppun India @ 20 (adjusted price). After a peak of around 115, the stock is now at below 60 for the obvious reasons known to everybody.
    Any idea on whether to sell Welspun India at current price or wait for some positivity to come in?

  30. Sir, ur views required in SHIVALIK RASAYAN

  31. Hi VP Sir, I have one general query on the new SEBI rules.

    Many people mentioning following after discussing a stock on social media/blogs:
    Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.
    Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

    Can you also do this way on the blog with above disclaimers? Please look into this sir.

  32. Dear VP sir,

    Kindly share your view on below stocks
    NR Agarwal
    Olympia industries
    Krebs bio
    Alps industries


  33. Sir Krebs can we invest in this for a longer period.. When their production start

  34. No problem Sir. We are long term investors. We will wait for your return - with more vigour and ideas.

  35. Sir, your view on ABFRL result.

  36. sir what is your view on Federal bank share price



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