Basic Accounting:
The Cash Flow Statement and Investor Information

If you're an investor, and you are trying to make a determination about the financial health of a business, you would need to read the Financial Statements in order to correctly ascertain this condition.  Each year, publicly traded companies are required to publish an annual report; in this report, there are at least three financial statements:
A Statement of earnings, a Statement of Financial position and a Statement of Cash Flows must be included with the report.

Although the Statement of Cash Flows is a relative newcomer to the Financial Statements set, it is relatively important in determining the financial health of the business, and is therefore included in the Annual Report.

What are investors looking for when they review the Annual Report, and examine the Statement of Cash Flows? 

Of course, as we discussed earlier, significant changes in the totals for investing or financing activities would indicate that there are either capital improvements, or a need to pay investor dividends; either situation would at first glance look appealing.  However, examination of the notes that accompany the statement should also shed light on the true meaning of the number changes.  Be wary of these notes, read them and cross reference them to the other statements included in the annual report.  Also, read the Annual report.  There is information within the report that might also give indication as to the true state of the financial health.

Net earnings figures in the operating activities information are hard to dispute; either the business was profitable, or it was not.

The second item of worth to the investor has to do with the type of investments the company has made.  If there are significant changes in the net cash provided by investing activities, what types of investments are being made?  New purchases of equipment and property would indicate business expansion.  Renovation expense for equipment and machinery might throw up a red flag.  Are they making the most of the equipment they have, or are they in a position that they must overhaul old, worn out equipment rather than purchase new?

The third item of significant interest to the investor is found when you compare cash flows to earnings figures.  In some instances, a company can report positive earnings on a statement of earnings, and negative net cash flow on the statement of cash flows.  There are varying reasons for situations like this, and upon comparison, if the situation warrants, there should be further investigation.

The analysis of the Annual report and the financial statements contained therein cannot be accomplished unless you have an education in accounting, finance, or have otherwise managed to educate yourself about the elements of the statements.  However, if you're an investor, take the reports to your broker.  They are trained to examine and analyze these statements; they can provide you with the analysis and interpretation of information into a format you can understand and act upon.

As you can see, just from this short analogy, the importance of the Annual Report and the financial statements that are a part of the report, are a tremendous opportunity for the investor to examine public financial information and make educated, sound investing decisions.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.