A cash flow statement is a financial document that shows how a company’s money has moved in and out over a period of time. The statement covers both the cash that has come into the company (from things like sales and investments) and the cash that has gone out (for things like expenses and dividends).
Looking at a cash flow statement can give you a good idea of a company’s financial health. A healthy company will have more cash coming in than going out, while an unhealthy company will have more cash going out than coming in.
One thing to keep in mind when reading a cash flow statement is that it is not always easy to understand. The terminology can be confusing, and the numbers can be hard to interpret. But don’t worry – we’re here to help!
In this article, we’ll walk you through everything you need to know about reading and understanding a cash flow statement. We’ll start by explaining what all of the different terms mean, and then we’ll show you how to use the information in the statement to assess a company’s financial health.
A cash flow statement is a financial report that shows how much money a company has earned or spent over a period of time. The statement can be used to track the company’s cash flow over time and to understand how the company is using its cash.
Most people find cash flow statements confusing. After all, it’s not every day that you have to deal with numbers and financial jargon. However, it’s important to be able to understand a cash flow statement if you want to make sound investment decisions.
Here are some tips on how to read and understand a cash flow statement:
1. Know the different types of cash flows
There are three main types of cash flows: operating, investing, and financing. Operating cash flows refer to the cash generated from a company’s normal business activities. Investing cash flows refer to the cash used for investing activities, such as buying new equipment or acquiring another company. Financing cash flows refer to the cash generated from activities such as issuing new shares or taking out loans.
2. Understand the purpose of a cash flow statement
A cash flow statement shows you how much cash a company has generated or used over a period of time. This information can be useful in assessing a company’s financial health and determining whether it is a good investment.
3. Look at the big picture
When reading a cash flow statement, it’s important to look at the big picture. Don’t get caught up in the details of individual transactions. Instead, focus on the overall trends. Are operating activities generating more cash than they are using? Are investing activities using more cash than they are generating?
4. Pay attention to red flags
There are some red flags that you should be aware of when reading a cash flow statement. If a company is consistently generating negative operating cash flows, that may be cause for concern. Also, if financing activities are accounting for a large portion of the company’s overall cash flow, that could be indicative of financial trouble down the road.