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How to Read a Cash Flow Statement

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min readLast reviewed

A cash-flow statement shows how cash moved in and out of a company during a period. It can be especially useful because accounting earnings and actual cash movement do not always match.

The three cash-flow sections

Most cash-flow statements are organized into three sections:

  • Operating activities: cash generated or used by the core business.
  • Investing activities: cash used for or generated from investments, capital spending, and acquisitions.
  • Financing activities: cash from borrowing, repaying debt, issuing shares, paying dividends, or buying back stock.

A healthy business often shows positive operating cash flow over time. That does not mean every quarter must be perfect, but persistent weak operating cash flow deserves attention.

Why cash flow can differ from profit

A company can report profit while cash flow is weak because customers have not paid yet, inventory increased, expenses were deferred, or accounting rules recognized revenue before cash arrived. A company can also report a loss while cash flow is better because of non-cash expenses.

That is why cash flow is a cross-check, not a replacement for the income statement.

Beginner questions to ask

Ask whether operating cash flow supports the company's plans. Is capital spending rising? Is debt being paid down or increased? Are buybacks funded by excess cash or new borrowing?

Cash flow does not predict the future, but it helps you understand financial flexibility.

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