Previously, we looked into how we can dissect the company’s financial health through its income statements. Ideally, we would want to invest in a stock that nets a positive and growing net profit over time. Now, we would peer into its cash flow statement. “What’s the difference between the two?” you may ask. A business’s income statement records revenues and expenses when transactions happen, not when cash is transferred. For example, it doesn’t mean that cash in the current assets section of the balance sheet will rise by $100 when there is a net profit of $100. On the other hand, when the cash flow statements shows an net cash inflow of $100, it literally means that the business has $100 more cash than its previous period.
A crucial aspect of investing in a company is its ability to generate cash. Experienced investors like companies that generate a big surplus of free cash flow. Free cash flow is a complicated way of describing excess cash. It is commonly defined as:
Free Cash Flow = Net Income + Depreciation – Working Capital Changes – Capital Expenditures
There are 3 sections to the cash flow statement: cash flow from operating, financing and investing activities. Once again, we use the example of Sheng Siong’s financial statements to illustrate the points.
Cash flow from Operating Activities
This shows the amount of cash generated from the company’s primary business activities. Savvy investors are attracted to companies whose operating activities produce a net positive cash flow. It is usually a good sign when this aspect of cash flow rises over time. As you can see from Sheng Siong’s cash flow statements, its cash generated from operating activities is a net positive one.
Cash flow from Financing Activities
This shows the activity of cash with external financing activities. In Sheng Siong’s case, there is a net outflow of cash due to dividend payments. In the 9 months ended 30 Sep 2017, about $52,000 thousand dollars of cash left the company.
Cash flow from Investing Activities
This shows the spending of cash on capital expenditures like property, plant and equipment or anything that is required to maintain the business. It also includes the purchases of investments or other businesses. In the 9 month ended 30 Sep 2017, Sheng Siong recorded a net cash outflow out of about $84,000 thousand dollars due to purchase of property, plant and equipment.
Overall, in the 9 months ended 30 Sep 2017, Sheng Siong had a net small rise in cash flow of about $1,300 thousand dollars. The net cash and cash equivalents at the end of the financial period 2017 is about $20,000 thousand dollars more than 2016. Looks like Sheng Siong’s cash flow performance is at least satisfactory in my opinion.
Some excerpts from this post is modified from Investopedia. For further reference, you can take a look here.