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Stock Financials - Cash Flow Statement Definitions Add to ...

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Cash Flow Statement

The cash flow statement shows the company's operating, financing and investing activities for a period. It shows investors exactly how a company generated its cash and how it was used. Cash flow assists investors in assessing the company's ability to generate cash internally, to repay debts, to reinvest and to pay dividends. The most conservative measure of a company's financial health, cash flow is much less vulnerable to manipulation than earnings.

The operating section shows how the company's basic business performed. Look for positive and growing cash from operations. Profits growing faster than cash from operations are a red flag for investors.

The financing section shows if the company borrowed money, or if the company issued or repurchased shares. Repurchase of stock is generally positive; sales of stock are generally negative unless explained by rapid growth which requires additional equity capital. Repayment of debt is generally positive. A profitable company with low financial leverage taking on new debt may be positive. A highly leveraged company taking on more debt can be dangerous.

The investing section highlights capital expenditures, purchase of investments and acquisitions in which the company has invested for the future. Large and growing capital expenditures means the company is investing significantly for the future. Foreign exchange rates have an impact on the net change in cash of companies with significant foreign holdings and export activities. This constitutes additional business risk. Beware of large changes in currency translation relative to net change in cash.

Look for companies with free cash flow, defined as EBITDA minus capital expenditures and dividend payments. Companies with free cash flow can finance growth and dividends from internal sources; companies with negative free cash flow may have to sell equity which will dilute investors' holdings, borrow money or sell assets

Cash Flow Statement Definitions

Cash flow - (Cash flow from operations) Income before extraordinary items plus non-cash items, such as equity income and depreciation, for continuing operations. It is important because it indicates the ability to pay its bills, finance growth and pay dividends.

Changes in current assets and current liabilities - This item represents net change in current assets and current liabilities other than cash, for example accounts receivable, accounts payable and inventory.

Cash generated from operating activities - Operating activities usually involve determination items including income statement, current assets and current liabilities. Operating cash flow is the cash that a company generates through its business. It is a better measure of a company's health than earnings, because a company can show positive net earnings on the income statement and still not be able to pay its bills.

Cash Flow Statement Definitions

Cash flow - (Cash flow from operations) Income before extraordinary items plus non-cash items, such as equity income and depreciation, for continuing operations. It is important because it indicates the ability to pay its bills, finance growth and pay dividends.

Changes in current assets and current liabilities - This item represent net change in current assets and current liabilities other than cash, for example accounts receivable, accounts payable and inventory.

Cash generated from operating activities - Operating activities usually involve determination items including income statement, current assets and current liabilities. Operating cash flow is the cash that a company generates through its business. It is a better measure of a company's health than earnings, because a company can show positive net earnings on the income statement and still not be able to pay its bills.

Purchases of investments - Increases in investments and advances, includes decrease in minority interest arising from purchase by parent of share of subsidiary, increase in investment in subsidiary and dividends to non-controlling interest.

Proceeds from sale of assets - This account includes sale of and disposal of long-term investments and fixed assets. Includes disposition of subsidiaries, increase in minority interest arising from sale of part of parents' share in subsidiary and dividends received from significantly influenced companies.

Payment for property, plant and equipment - Purchases of fixed assets net of government grants and allowance for funds used during construction. For integrated oil companies, includes exploration and development expenses. Fixed assets acquired from the acquisition of subsidiaries are also included.

Payment for acquisition of subsidiaries - Purchases of subsidiaries which results in ownership of more than 50% of the acquired company. Does not include increases in share ownership.

Increase in loans to customers - This account is used for banking and finance sector companies, and includes all increases in loans and long term interest bearing receivables, other than accounts receivable.

Decrease in loans to customers - This account is used for banking and finance sector companies, and includes all decreases in loans and long term interest bearing receivables, other than accounts receivable.

Cash generated from investing activities - Investing activities involving cash flows generally resulting from changes in long-term assets.

Proceeds from issuance of stock - Includes any increase in capital stock of the company, including re-issue of treasury stock. Does not include issue of shares by subsidiary or increase in contributed surplus. Includes shares issued for stock dividends and increase in stock subscriptions receivable.

Repurchase of stock - Repurchase/redemption of capital stock of the company. Does not include repurchase/redemption of stock by subsidiaries or decrease in contributed surplus.

Proceeds from issuance of debt - Any increase in debt and advances, includes those from related parties.

Repayment of debt - Any reduction in debt and advances, includes those from related parties.

Increase in customers' deposits - This account includes all increases in demand deposits, short-term deposits, r.s.p. deposits, guaranteed investment certificates, and any deposits left on account from customers, but does not include reinsurers' deposits.

Decrease in customers' deposits - This account includes all decreases in demand deposits, short-term deposits, r.s.p. deposits, guaranteed investment certificates, and any deposits left on account from customers, but does not include reinsurers' deposits.

Cash generated from financing activities - Financing activities involving cash flows generally resulting from changes in long-term financing and shareholders' equity items.

 

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