Cash Flow Statement, or CFS in English, is a financial statement that measures the inflow and outflow of cash and cash equivalents of a listed company during a specific period of time, reflecting the company's cash receipts and expenditures. This statement provides detailed information on the company's cash flow, showing the company's cash flow from operating, investing and financing activities. By analyzing the cash flow statement, combined with the income statement and balance sheet analysis, you can understand the company's current operating status. Cash and Cash Equivalents (Cash and Cash Equivalents): refers to the cash held by the company and assets that can be converted into cash in the short term (usually 90 days), such as commercial paper, U.S. short-term Treasury bonds and other highly liquid short-term investments; Restricted Cash: refers to cash that an enterprise cannot freely use due to specific purposes or conditions. This cash may be restricted due to contractual provisions, legal requirements or for the purpose of specific financial arrangements. For example, restricted cash may include a security deposit to guarantee debt repayment or funds set aside for a specific project. A cash flow statement typically contains the following three categories: Cash generated by operating activities Cash generated by investing activities Cash generated by financial activities When reflected on the cash flow statement, all cash flow is reflected as positive cash flow (Positive Cash Flow) and negative cash flow (Negative Cash Flow) according to the inflow and outflow of the company: Positive cash flow is the cash flow obtained by the company during the accounting period, displayed as "+" or normal numbers; Negative cash flow is the cash flow paid by the company during the accounting period, represented by "-" or adding "()" to the amount figure. 1. Cash flow generated from operating activities Cash flow generated by operating activities, English is Cash generated by operating activities. This part of the cash flow section details the company's cash flow from income or expenses used in its regular operations. Including income from selling goods or providing services, as well as the costs required to make products, all employee wages, rent for production sites, etc. At the same time, under U.S. GAAP, interest paid and received is always treated as cash flow used in operating activities. 2. Cash flow generated from investing activities Cash flow generated by investing activities, English is Cash generated by investing activities. This part of the cash flow mainly includes the cash flow generated when the company sells or purchases tangible or intangible assets. Asset types include land, properties, factories, equipment, vehicles, patents, franchise rights, etc. Among them, expenditures for the purchase of fixed assets such as properties, plants and equipment (sometimes collectively referred to as PPE) become capital expenditures (CapEx). This part of the cash flow data is special when analyzing the company's cash flow. The growth of capital expenditures indicates that the company is entering the expansion stage. Although it will numerically lead to a decrease in the company's total cash flow, when analyzed specifically, this decrease does not mean a decrease in the company's ability to manage cash. 3. Cash flow generated from financing activities Cash flow generated by financing activities, English is Cash generated by financing activities.
This part of the cash flow mainly includes cash flow involving investors, banks and creditors, including investment cash flow from investors or banks, loan cash flow, dividends paid to shareholders, equity repurchase cash flow, cash flow from debt repayment, loans, etc. What are the methods for calculating cash flow? When calculating cash flow, there are two main methods used: Direct Cash Flow Method Indirect Cash Flow Method direct cash flow method The Direct Cash Flow Method records and calculates all income and expenses, and then lists all cash flows in a cash flow statement. It can also be calculated and tabulated through the opening and closing balances of various assets and accounts. It is the most commonly used tabulation method for small companies with relatively simple operating structures. indirect cash flow method The indirect calculation method, also known as the Indirect Cash Flow Method in English, is to adjust net income by adding or subtracting the differences caused by non-cash transactions and then calculating and tabulating it. For some companies with complex structures or larger scales, the direct calculation method cannot accurately reflect all the company's assets and cash, so the figures need to be adjusted to produce a cash flow statement that is more consistent with the company's situation. When using the indirect calculation method, professional accountants will use some templates to prepare a cash flow statement with the help of an income statement and a balance sheet. How to read the cash flow statement? Take, for example, Apple's cash flow statement filed with the U.S. Securities and Exchange Commission (SEC), which is a cash flow statement prepared using the indirect calculation method. Things to note are: Depending on the operating conditions and content of different companies, the sub-projects under each major category will be different. In this table, all income items are expressed as normal numbers, and all expenditure items are expressed as numbers with "()", so they need to be subtracted when calculating. Data source: SEC The cash flow statement usually contains: 1. Initial cash amount (Cash, cash equivalents and restricted cash, beginning balances) The first column lists the initial cash amount, which shows the company's cash situation before the cash flow statement preparation period. Used to compare with the current cash flow balance to analyze the company's cash flow growth or decrease. 2. Operating activities This column lists all changes in cash flows generated by operating activities. The table is labeled "Operation Activities" and contains many sub-items: Net income Net income is taken from the income statement, which is Net income or Net Profit in English. For the income statement on September 30, 2023, its net income was $96,995 million. Therefore, this value is used directly in the cash flow statement. Adjustments to reconcile net income to cash generated by operating activities This section lists the non-cash expenses that adjust net income to cash flow and may include the following components: Depreciation and amortization: It is a method used in accounting to allocate the cost of long-term assets. In the cash flow statement, they are added back to net profit as non-cash transaction items to adjust the cash flow generated from operating activities to more accurately reflect the company's cash generation ability. Share-based compensation expense (Share-based compensation expense): refers to the compensation provided by the company to employees in the form of stock options, restricted stock units, etc. Although the individual expense is included in the income statement, it will be added back to net profit in the cash flow statement because it is a non-cash expense and does not involve actual cash outflows.
Other: Other non-cash items, such as deferred income tax benefit. Changes in operating assets and liabilities Changes in operating assets and liabilities refer to the company's adjustments to cash flows based on operating assets and liabilities, which may include: Accounts receivable (Accounts receivable): refers to the money that a company should pay from customers for selling goods or providing services but has not yet received. Inventories: refers to goods held for sale, products in production, and raw materials held by an enterprise. Vendor non-trade receivables: These receivables may arise from refunds, tax refunds or other non-sales-related payments from suppliers to the company. Other current and non-current assets: Includes those assets held by the company outside normal business operations that are neither common categories of current assets such as cash and cash equivalents, accounts receivable, and inventory, nor other types of assets that are common non-current assets such as fixed assets. Accounts payable: refers to liabilities that a business owes suppliers for the purchase of goods or services but has not yet been paid. Other current and non-current liabilities (Other current and non-current liabilities): include other liabilities borne by the enterprise in the normal course of operations, but do not fall into the main categories such as accounts payable, short-term borrowings or long-term debts. The cash flow used for operating activities in the current period after adjustment by the above part is equal to the sum of all income of this part minus the sum of all expenses. 3. Investing activities This column lists all cash flow changes used for the company's investing activities. The table is marked "Investing Activities" and the small items included are as follows: Purchases of marketable securities Proceeds from maturities of marketable securities (Proceeds from maturities of marketable securities) Proceeds from sales of marketable securities (Proceeds from sales of marketable securities) Payments for acquisition of property, plant and equipment Payments made in connection with business acquisitions, net (net payments related to business acquisitions) Purchases of non-marketable securities Proceeds from non-marketable securities Cash generated by or used in investing activities This item shows a summary of cash generated (or used) by investing activities. That is, the cash flow used for investing activities in the current period calculated from the above project expenses. The amount is equal to the sum of all income in this part minus the sum of all expenses. Financing activities
This column lists the changes in cash flows used by the company to carry out financial activities. The table is marked "Financing Activities" and contains the following items: Proceeds from issuance of common stock Payments for taxes related to net share settlement of equity awards Payments for dividends and dividend equivalents (Fees for dividends and dividend equivalents) Repurchases of common stock (repurchase stock) Proceeds from issuance of term debt, net (net proceeds from the issuance of term bonds) Repayments of term debt (repayment of term debt) Proceeds from/(Repayments of) commercial paper, net (Proceeds from/(Repayments of) commercial paper, net) Summary of cash flow generated from financing activities (Cash used in financing activities) This column shows the cash flow used for financial activities in the current period after calculating the above project expenses. The amount is equal to the sum of all income in this part minus the sum of all expenses. 5. Change in cash flow (Increase or Decrease in cash, cash equivalents and restricted cash) The increase or decrease in cash flow for the current period is calculated based on the sum of all cash flows used for operating activities, investing activities and financing activities during the reporting period. 6. The company’s cash flow for the current period (Cash, cash equivalents and restricted cash, ending balances) The ending balance of the current period, calculated from the opening balance of the statement and the increase or decrease in cash flow for the current period, is also the amount of cash held by the company at the end of the current period. 7. Supplemental cash flow disclosure This item is a supplement to the cash flow data in the table and generally includes: Cash paid for income taxes, net (net cash paid for income taxes, net) Cash paid for interest (cash used to pay interest) Below is the cash flow statement released by Amazon.com on March 31, 2021. This section will further explain how to read the cash flow statement based on Amazon's cash flow statement. In the explanation, we use M to represent millions. For example, $36,410M refers to $36,410 millions. Data source: SEC For quarterly data Opening cash flow for Q1 2020 was $36,410M and for 2021 it was $42,377M. Income generated from operating activities increased in the first quarter of 2021 compared with the same quarter of 2020, from $3,064M to $4,213M. Expenditures for investment decreased in the first quarter of 2021 compared with the same quarter of 2020, from $8,894M to $8,666M. Expenditures for financing increased in the first quarter of 2021 compared with the same quarter of 2020, from $2,591M to $3,476M.
As a result, in the first quarter of 2020 and the first quarter of 2021, Amazon's cash flow decreased by $8,905M and $8,222M respectively, and the ending cash balances were: $27,505M and $34,155M respectively. For full year data The opening cash balance in 2020 was $23,507M and in 2021 it was $27,505M. Income generated from operating activities has increased significantly in 2021 compared with 2020, increasing from $39,732M to $67,213M Expenditures for investment will increase in 2021 compared with 2020, increasing from $25,053M to $59,383M Expenditures for financing will be significantly lower in 2021 than in 2020, from $10,280M to $1,989M As a result, Amazon's cash flow increased by $3,998M and $6,650M respectively in 2020 and 2021, and its ending cash balances were: $27,505M and $34,155M respectively. How to use cash flow statement for investment analysis? By comparing the data provided in the cash flow statement with previous period cash flow statements, or combining it with other data, multiple investment analysis indicators can be calculated and analyzed, such as: 1. Growth and decrease in cash flow Growth in cash flow is generally considered a good situation, but if it is found in the details that the company is increasing cash flow by selling a large number of assets, it may indicate that there is a problem with the company's operations. If there is a decrease in cash flow, it is usually a cause for concern, but if it is found in the details that the company has invested more cash in research and development or purchasing equipment, it may indicate that the company is entering a stage of rapid development. 2. Cash flow to sales ratio Cash Flow Margin Ratio, in English, is Cash Flow Margin Ratio. This indicator compares the company's cash flow from operating activities to the net sales or net income provided in the income statement, that is: Cash Flow Margin Ratio = Operating Cash Flow/Net Sales The ratio means the amount of cash the company generates for every $1 of product sold, and usually the higher the number, the better. 3. Free cash flow Free cash flow, English is Free Cash Flow, free cash flow is the cash income obtained through operating activities minus capital expenditures, that is Free Cash Flow = Operating Cash Flow – CapEx This indicator shows how efficiently a company generates cash through operations, and investors will use this value to judge a company's ability to pay dividends or share repurchases. 3. Cash flow coverage ratio Cash flow coverage ratio, English is Cash Flow Coverage Ratio, cash flow coverage ratio is obtained by comparing the ratio of cash flow obtained from operating activities to total debt, that is Cash Flow Coverage Ratio = Operating Cash Flow / Liabilities This number indicates whether the company has enough cash flow to repay its debt. The higher the ratio, the better. 4. Current liability coverage ratio Current Liability Coverage Ratio, in English, is Current Liability Coverage Ratio. This indicator is calculated by comparing the cash flow obtained from operations with current liabilities, that is: Current Liability Coverage Ratio = Operating Cash Flow / Current Liability If the ratio is less than 1, it means that the company's current cash flow cannot pay its short-term current debt, and it may be at risk of bankruptcy, so the higher the indicator value, the better. 5. Price to Cash Flow Ratio Price to Cash Flow Ratio, English is Price to Cash Flow Ratio. This indicator is calculated by dividing the stock price per share by the operating cash flow per share, that is:
Price to Cash Flow Ratio = Share Price / Operating Cash Flow per Share This number is used to measure whether a stock is undervalued. It is also more reliable than the price-to-earnings ratio (P/E) because cash flow is more difficult to modify than earnings. 6. Cash flow to net income ratio Cash Flow to Net Income ratio in English is Cash Flow to Net Income. The calculation method of this indicator is the ratio of cash flow to net income. The calculation formula is as follows: Cash Flow to Net Income = Cash Flow / Net Income When this indicator is close to 1, it means that the financial statements reported by the company are more credible and have not been artificially modified. Analysts outside the company often use this value to judge the authenticity of the financial statements submitted by the company. How to query a company's cash flow statement? Investors can check the company's cash flow statement from the target company's official data website and third-party data websites such as Marketwatch, Yahoo finance, Morningstar, MSN Money, and Reuters. The following is an example of reviewing Apple's cash flow statement: Method 1: Check the official data website Enter on the Google search page: investor Relations site:apple.com to enter the official page Scroll down the page to the Financial Data section and click the Financial Statements link for the corresponding period. In the pop-up box, the table in Chapter 3 is Apple’s cash flow table for the current period. Method 2: Through third-party financial websites Taking Yahoo finance as an example, log in to its main website and enter the company name in the search box at the top of the page. After entering the company data page, click Financials in the data column and click Cash Flow to view the cash flow statement for different periods. How does the cash flow statement relate to the balance sheet and income statement? The cash flow statement, balance sheet, and income statement together form a basic data report that reflects a company's financial status. When a company's financial situation needs to be comprehensively analyzed, different data from the three must be combined to obtain a complete financial situation analysis. When the financial statements are prepared correctly, the change in a company's net cash flow should be equal to the change in cash in its balance sheet during the two accounting weeks. For example, if you need to calculate the increase or decrease in company A's net cash flow from 2020 to 2021, the value should be equal to the difference between the cash portion of the balance sheet in 2021 and 2020. If the indirect calculation method is used to prepare a cash flow statement, the income statement can show how cash flow increases or decreases through business, and the balance sheet can show how different transactions affect different cash flows during operations, such as accounts receivable, accounts payable, and inventory. Therefore, professional accountants will first prepare the income statement and balance sheet, and then use the data in them to prepare the cash flow statement. Importance of Cash Flow Statement The importance of the cash flow statement to a company lies in: 1. Reveal the company’s current operating capabilities Based on the various amounts shown in the current period's cash flow statement, you can view the company's income and expenses of each department under the current operating model, and learn more about the company's current operating capabilities. 2. Reflect the current stage of the company After comparing with the past cash flow statement, it can be analyzed that the company is currently in a period of rapid growth or stable development, or there are operational problems and the company's development has stagnated or even regressed. 3. Provide guidance on the operating model Based on the comparison of the cash flow data of each department in the cash flow statement, combined with the comparison of previous cash flow statements, we can find the income and expenditure of each department during the company's operations. From this, we can adjust the operating methods between different departments according to development needs, control costs or increase revenue to improve the company's overall operating capabilities.
4. Helps judge the company’s investment value External investors or loan lenders can judge the company's cash holdings and assets based on the data provided by the cash flow statement, thereby judging the company's future development, risk resistance, and debt repayment capabilities. Limitations of the Cash Flow Statement Although the cash flow statement is one of the most important financial statements, it also has its limitations when used, mainly reflected in: 1. Limited information provided No matter which calculation method is used to prepare the cash flow statement, the information it expresses is still limited to the cash currently held by the company. However, for a company, the cash held is part of the assets. If you need to accurately analyze a company's operating capabilities and current situation, you still need to conduct in-depth analysis in conjunction with other financial statements such as the income statement and balance sheet. 2. The uncertainty of report data on the development process The main content reflected in the cash flow statement is the company's current cash position. For companies that need to develop rapidly or invest a lot of research funds, the results shown by the cash flow statement in the short term may not be ideal, or even negative. But later on, these input expenditures can result in very large value returns. If you only look at the results of the current cash flow statement, you cannot make the most accurate judgment on the company's development process. More company valuations What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate? What is company profit? Gross profit, operating profit, net profit What is enterprise value multiple? Enterprise Multiple What are preferred shares? Preferred Stock What is operating leverage? Degree of Operating Leverage What is debt service ratio? Debt Service Coverage Ratio