Analyze Cash Flow Statement

As an investor or business understanding the importance of cash flow statement is very essential. This statement shows the flow of the money that comes in and out of the business. Preparing a cash flow statement when doing business will help your business avoid running out of cash. Before you analyze cash flow statement, you should first analyze the structure of statement of cash flow. Here in this article we will discuss about cash flow statement analysis.

The structure of the cash flow statement can be categorized into operating, investing and financing. Statement of cash flow generated by operations reflects the cash produced by the company's ongoing operations. This statement of cash flow used or generated by operations is one of the most important numbers on the statement of cash since it is the cash available from ongoing operations to reinvest in the business, repay debt, pay dividends, etc. To analyze statement of cash flow, you also need to look into the investing activities which include capital expenditures, acquisitions or sales of businesses or property for cash, and other investing activities.

For analyzing cash flow statement, you also need to look into cash generated or used by financing activities. Cash inflows in this section include bank borrowings, debt issuance, and the sale of equity. The total of the cash generated by or used by these three sections is shown on the cash flow statement as the year's net change in cash and cash equivalents. To analyze cash flow statement, you require considering some few important things.

The first step to consider for analyzing statement of cash flow is to find out whether operations consistently generate cash and what is the trend of this figure. You will always prefer to see positive cash flow generated by operations. The second thing to keep in mind is to what extent is cash generated by operations sufficient to pay annual capital expenditures and cash dividends. This figure is sometimes called free cash flow. This figure is very useful as give you an idea of a company's ability to whether a slowdown or a downturn, to grow its business long term, and to maintain and grow its dividend. The free cash flow number discussed above excludes cash used to make acquisitions or from the sale of businesses.