Cash flow statement
Key points
- It is the best way to spot companies that report profit but generate no cash; it determines debt-service and dividend capacity.
- Positive and growing operating cash signals a healthy business model, while persistently negative free cash flow signals dependence on external funding.
- negative free cash flow can be normal during growth investment.
Formula / calculation
cash from operating activities (core business), investing activities (plant purchases, subsidiary sales) and financing activities (borrowing, dividends, capital raises). Free cash flow = Operating cash − Capital expenditure.
Interpretation
Positive and growing operating cash signals a healthy business model, while persistently negative free cash flow signals dependence on external funding. The ratio of operating cash to net profit shows earnings quality; well below 1 may indicate receivable or inventory build-up.
Pitfalls
negative free cash flow can be normal during growth investment. One-off asset sales inflate investing cash. Lease payment classification (IFRS 16) complicates cross-company comparison.
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Frequently asked questions
What is Cash flow statement?
The cash flow statement shows how much cash a company generated and spent in operating, investing and financing activities over a period.
How is Cash flow statement calculated?
cash from operating activities (core business), investing activities (plant purchases, subsidiary sales) and financing activities (borrowing, dividends, capital raises). Free cash flow = Operating cash − Capital expenditure.
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