Publicly traded companies are under intense pressure to constantly meet
financial projections each and every quarter. There are many analyst
eyes in the financial profession that are glued to every word and press
release that come out for their covered companies. It is no surprise
then that company CFOs make it a priority to at least meet, if not
exceed earnings and sales estimates. If not, their stocks get
decimated.
Companies have become adept over the years at
managing earnings to the point that they can be untrustworthy. So what
to do? A good alternative is to look at a companys cash flow. Cash flow
is simply a measure of the amount of net money coming in. It is
different from net income in that it doesnt measure sales made on
credit. The net income figure at the top of the cash flow statement is
taken directly from the income statement.
Many analysts
believe cash flow to be as important if not more important than net
income in determining the health and future prospects of a company. The
cash flow statement is a vital part of understanding a companys
operations, along with the income statement and balance sheet.
Investors can ascertain how a companys money is being spent and where
its coming from.
Cash flow is determined from three main components: operations, investing, and financing.
OPERATIONS:
This component measures how much cash is
generated from the companys main operations. Adjustments must be made
to the net income number to account for non-cash transactions such as
depreciation, accounts receivable/payable, and inventory. Since these
transactions do not occur in cash, they have to be adjusted for the
cash flow statement. For example, if accounts receivables decrease, it
means that more cash has flowed through the company due to a customer
paying off a credit account.
INVESTING:
Transactions dealing with equipment, assets,
or investments deal with the investing component. When a company buys a
new tractor, it is subtracted from cash flow since cash is used to
purchase the equipment.
FINANCING:
Cash transactions in debt, dividends, and
loans make up the financing portion of the cash flow statement. If a
company issues debt, cash flow from financing increases.
Here is a sample cash flow statement from our friends at Vandelay Industries:
| Cash Flow (In millions of dollars) |
| Period Ending |
31-Dec-05 |
| Operating Activities, Cash Flows Provided By or Used In |
| Net Income |
17,853 |
| Adjustments To Net Income |
13,260 |
| Depreciation |
2,121 |
| Changes in Account Receivables |
14,188 |
| Changes In Liabilities |
31,571 |
| Changes In Inventories |
|
| Changes In Other Operating Activities |
(93,847) |
| Total Cash Flow From Operating Activities |
(14,854) |
| Investing Activities, Cash Flows Provided By or Used In |
| Capital Expenditures |
(2,354) |
| Investments |
(23,757) |
| Other Cash flows from Investing Activities |
(20,196) |
| Total Cash Flows From Investing Activities |
(46,307) |
| Financing Activities, Cash Flows Provided By or Used In |
| Dividends Paid |
5,773 |
| Treasury stock acquired Paid |
(2,416) |
| Issuance of long-term debt |
67,054 |
| Payments and redemptions of long-term debt |
(45,800) |
| Change in deposits |
42,136 |
| Contract holder fund deposits |
8,346 |
| Contract holder fund withdrawals |
(5,976) |
| Cash flows from financing activities of continuing operations |
64,405 |
| Effect of exchange rate changes on cash and cash equivalents |
579 |
| Change in cash and due from banks |
$3,823 |
