Understanding cash flow truly: it's not just the numbers seen on the last line

Most investors tend to focus more on the income statement, but in reality, cash flow is the heartbeat that drives a company’s operations. The cash inflows and outflows indicate whether the company has enough liquidity to continue its work. The cash flow statement is not just a number at the bottom; it tells the true story of a company’s actual financial health.

How is the cash flow statement different from other financial statements?

There are three main financial reports, each telling a different story:

Balance Sheet (Balance Sheet) is a snapshot of a company’s financial position at a specific point in time. It shows “as of today, how much assets and liabilities does the company have?” Like a photo of the company at that moment, but it doesn’t tell where the money came from or where it went.

Income Statement (Income Statement) indicates performance over a period, such as how much profit the company made this year. The problem is, “profit” in this statement is not always cash. The company might report a profit but not have received the actual cash yet.

Cash Flow Statement (Cash Flow Statement) reveals the real story. It shows how much cash the company actually received and paid out, whether from sales, investments, or borrowing.

What exactly is cash flow?

Cash flow statement is the core of fundamental analysis because it shows the actual movement of cash within the company. Cash flows move through three main channels:

1. Operating Cash Flow (Operating Cash Flow)

This is what investors should really focus on. It shows cash received from selling products, services, commissions, etc., and cash paid for costs like production, salaries, taxes, and other operating expenses.

If operating cash flow is positive and growing, it indicates the company is generating real revenue, not just a one-time gain.

2. Investing Cash Flow (Investing Cash Flow)

This indicates whether the company is spending cash on investments in real estate, equipment, or securities. The company also receives cash from selling these assets.

A negative cash flow from investing activities (big expenses) can be good, showing ongoing investments for growth. But if it’s consistently positive, it might mean the company is selling assets, which isn’t sustainable long-term.

3. Financing Cash Flow (Financing Cash Flow)

This shows cash received from issuing new shares or borrowing, and cash paid for debt repayment or share buybacks.

A negative financing cash flow indicates the company is paying down debt (debt repayment), which is good. But if it’s positive for a long time, it might suggest the company relies heavily on borrowing.

What should a healthy cash flow statement look like?

Having a lot of cash on hand doesn’t necessarily mean it’s good. Truly strong companies are those that use their cash effectively.

Key points to watch:

• Operating Cash Flow should be positive and consistently growing, indicating real revenue generation.
• Investing Cash Flow should be negative at a reasonable level (about 20-30% of operating cash flow), reflecting ongoing investments in machinery and technology.
• Financing Cash Flow should be negative and gradually increasing (more negative), showing the company is paying down debt and returning value to shareholders, which investors should be comfortable with.

The term “Free Cash Flow” (Free Cash Flow) is crucial. It’s Operating Cash Flow minus Investing Cash Flow. This figure shows how much cash the company has left to expand, pay dividends, or buy back shares.

Learn from Microsoft’s example

Let’s look at Microsoft’s cash flow from 2020-2023:

The company reported an increase in operating cash flow from $60 billion to $87 billion, which is excellent because it indicates that revenue growth is coming from actual sales of products and services.

Microsoft’s investing cash flow is negative, around $20-25 billion annually (about 25-30% of operating cash flow), reflecting steady investments in equipment and technology. Some of this investment likely goes into cloud infrastructure to support long-term growth.

Interestingly, Microsoft’s financing cash flow is negative, about $40-50 billion annually, mainly due to share buybacks (share buyback), which is a way for the company to return value to shareholders.

Calculating Microsoft’s Free Cash Flow gives approximately $60-65 billion per year, a strong indicator of financial strength. This leftover cash shows Microsoft’s ability to invest, support growth, and return value to shareholders simultaneously.

Conclusion

Analyzing the cash flow statement isn’t difficult, but it’s essential to understand that cash flow is about real money, not just the numbers at the bottom line. Investors should look at all three channels—operating, investing, and financing—to assess whether a company can survive and grow.

A good combination is strong Operating Cash Flow, steady Investing Cash Flow for growth, and a negative Financing Cash Flow that indicates the company is paying down debt. This suggests a healthy, sustainable financial position.

Now, when you open a cash flow statement, you’ll know what to look for and understand what the numbers reveal about the true health, symptoms, and potential of the company.