Earnings Basket: Five Perspectives for Analyzing a Company's Cash Flow
Cash flow is considered a very important aspect of any company's financial stability. Positive and stable cash flow can be crucial to maintain financial health, while cash flow disruptions can lead to bankruptcy risk. Moreover, cash flow often has a significant impact on stock valuation.
To evaluate a company's cash level, it's important to consider focusing on five key areas which we'll explore in more detail below.
1. Cash flow from operating activities
This section shows the cash inflows and outflows from the company's daily operations, such as sales income and cash paid to suppliers. Subtracting cash outflow from cash inflow, we can get the net cash flow from operating activities.
If the number is positive, it means the company's operating activities generate more cash than it consumes; If the company's net cashflow from operating activities exceeds net income, the company typically is in a sound financial position.
2. Cash flow from investing activities
Cash flow from investing activities involves new plant construction and investments. When analyzing cash flow, it's important to pay close attention to the capital expenditures related to the purchase and sale of fixed assets.
If a company spends too much of its net income on expansion, its overall cash flow will usually be affected. Moreover, the depreciation of equipment and production lines, as well as potential future replacement costs, can further erode net income. This may explain why many companies with an asset-heavy structure tend to have lower valuations.
3. Cash flow from financing activities
Cash flow from financing activities includes debt addition and repayment, the issuance and buyback of stocks or bonds, and dividends paid to shareholders.
Closely monitoring dividend payments and share buybacks is also key. Even in the absence of financial outperformance, companies like Coca Cola and Oracle have seen their stock prices rise in the long term after increasing their ROE through dividend payments or boosting EPS by share repurchases.
4. Cash balance
A company's cash balance is the amount of cash it currently has on its balance sheet, as well as any short-term investments that can be quickly converted to cash.
If a company's cash balance exceeds its short-term liabilities, this indicates that it has sufficient liquidity and less immediate pressure to service its debt. Moreover, if the company's cash balance continues to grow over time, it generally sends a positive signal to investors.
However, it's worth noting that some companies with large cash flows may use their excess funds to buy back shares or pay dividends instead of maintaining a high cash balance. As such, when evaluating a company's cash flow, it may be necessary to exclude the impact of share buyback and dividend payments to get an more accurate picture of their financial health.
5. Free cash flow
Many US-listed companies disclose free cash flow in their financial statements. It is calculated by subtracting capital expenditures from operating cash flow.
If a company's free cash flow consistently grows and exceeds its net income, it may be more attractive to investors. Besides, the market may be willing to give a higher valuation for such companies.
To learn more, check out a featured course on moomoo Learn: How to value a stock with better methods.
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Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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MoneyComesMoneyStays : There needs to be a new category: cash hoarding.
lightfoot : Cash flow is leverage, from Sales positive, from finance positive Continuity, sustainability, for dividends, for company ratings. Cash flow is a security blanket for borrowing for expansion, Inventories
73766169 : apologies for being absent.
ROCKY167 : I learned a lot from this thank you very much guys
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lightfoot : There are cash reserves ,look at Apple. Money is capital and we. need to put it to work. Some reserves is good for leverage. extraordinary expenses
bimbam :
Moomoo LearnOP lightfoot: Thanks for taking the time to write an in-depth review.
Moomoo LearnOP MoneyComesMoneyStays: Any further feedback is always welcome.
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