The CASH FLOW STATEMENT: all the basics in 9 minutes

imagine if you could quickly tell if a company  was a cash flow machine or a cash burning dumpster fire believe it or not but you can do that in  just a few seconds by analyzing its cash flow statement but what is a cash flow statement and  how do you read it in this video I'll explain the layout of a cash flow statement the key terms  to track and tricks to analyze it fast all in less than 10 minutes hi my name is Brian Feroldi  I'm a financial educator who's been analyzing and investing in individual businesses for more  than 20 years the clock is ticking so let's get going so what is a cash flow statement  it's a financial report that shows how cash moves throughout a business over a specific period  of time usually a quarter or a year its primary purpose is to show if a company is producing cash  or consuming cash the cash flow statement answers the question are you generating cash or are you  consuming cash like the income statement the cash flow statement is measured over a period of  time so there's a start time and an end time to the cash flow statement the cash flow statement  can be broken down into three primary sections there's operating activities investing activities  and financing activities let's take a look at the cash flow statement of a pretend business I made  up called best coffee company now at the very top of the cash flow statement is the company's  net income this number is actually borrowed from the bottom of the income statement which  shows just how tightly these two statements are related to each other now once we start with  net income the first thing we have to do is add back any non-cash charges non-cast charges  could be things like depreciation amortization or stock-based compensation now the reason we  add these back is on the income statement these non-cash charges were accounted for in cost of  goods sold and operating expenses but remember they were noncash so since cash didn't leave our  bank balance we need to add them back in when accounting for them on the cash flow statement the  next line item here is changes in working capital these could be cash movements due to changes  in receivables accounts payable or inventory during any given period these numbers can flow  up or down on the company's balance sheet and depending on the direction they could be producing  cash or consuming cash once we add up all of these lined items together we get the total amount of  cash that flowed to the business due primarily to the company operating itself the next section is  called investing activities and this is how the company uses its cash flow to make investments in  the business the most important line item here is something called Capital expenditures which is all  spending done on property plant and Equipment this could be building stor or paying for furniture  or equipment used in the business the next line item here would be Acquisitions where we would  account for any cash payments that we made to acquire another company the final item here would  be sale of Investments so if we sold one of our assets such as capital expenditures or one of  our Acquisitions that would generate cash due to investing the next thing we do is we add up all  of the sources of cash from investing activities we add them together the final section is called  financing activities and there's a number of ways that we could add or subtract cash to our balance  sheet based on what we're doing with financing the first major category here is are we borrowing  money or issuing debt that would create cash or are we repaying debt that would consume cash  the next major category relates to our stock if a company is issuing stock and selling it  to investors that would create cash or if the company is repurchasing stock from those same  investors that would consume cash the final category here relates to dividends if a company is  making dividend payments to its shareholders that activity would consume cash then we simply add  up and subtract all the sources of cash due to financing activities now once we've done all that  we take the cash flow from operating activities we add it to the cash flow from investing activities  and we add that to the cash flow from financing activities that gives us our total amount of  change in cash during that particular period Then when we add that change in cash to what  we started with we end up with our ending cash balance and this number goes right to the balance  sheet and becomes our new cash balance at the end of the period showing once again and how these  statements are related to each other now it's important to understand that not all companies  use these exact terms and layouts when they're making their financial statements in fact not all  companies even call this financial statement the cash flow statement for example I've seen the cash  flow statement called the statement of cash flows the financial flow statement the statement of  cash operations or even the operating cash flow statement in fact here is a visual that shows  some of the different terms that you might see on a cash flow statement itself and this is true  of all the financial stat statements where the terms you might see on them vary greatly from  company to company now if you're interested in learning more about these terms I created a  free ebook called financial statement school that will allow you to download these visuals so  you can understand all the financial statements visually to grab a free copy of this ebook just  visit the link you see on your screen or click the link in the video description now there's  another critical term that you get from reading a cash flow statement but it's not specifically  called out on the cash flow statement that term is called free cash flow this is the total amount  of free cash that a business generates and can be used to reward its shareholders calculating a  company's free cash flow is fairly simple you simply take the total cash flow from operating  activities and then you subtract the spending on Capital expenditures this simple calculation will  give you the total amount of free cash flow that a company generated During the period now the cash  flow statement that I showed you only had one year of data for Simplicity however cash statements  usually have multiple years of data on them which can help the investor spot Trends here for example  is three years worth of financial DeMent for best coffee company now when it comes to learning  how to analyze a cash flow statement there are five key numbers that I look at first the very  first number that I pay attention to is the cash flow from operating activities this is the total  amount of cash that was generated from operating the business in this case we see that cash flow  from operating activities is consistently growing the second number that I pay attention to is the  company's Capital expenditures or spending on property plant and equipment in this case we see  that this company is continuing to increase its capital expenditures from $1,000 all the way up  to $2,000 the next number that I like to focus on is a company's cash flow related to debt in this  case we see that this business has repaid in two separate tranches $1,000 worth of its debt which  means that it's deling its balance sheet which I view to be a good thing the next number that I  pay attention to is the amount of stock that a company is either repurchasing from its investors  or issuing to those same investors now the final number that I always pay attention to is in the  non-cash charges section and specifically I like to focus on how much stock-based compensation a  company is issuing to its employees I want to make sure that this number is reasonable when compared  to the company's size and that it's not over ISU stock to its employees now that you know the five  key numbers to look at let's take the look at the cash flow statement of a real company to see these  numbers in action here is the cash flow statement of Dollar General a retailer in the United States  the first thing to note is the direction that we're looking at here in this case the right hand  side is the oldest data and the left hand side is the most recent data so we're going to be reading  this cash flow statement from right to left the other thing to note is that this company's net  income which is taken directly from the income statement has actually dropped from 2. 4 billion  down to 1. 7 billion during this particular time frame all right with that in mind let's take  a look at those five key numbers on the cash flow statement that I teed up before the first  number to look at here is the cash provided by operating activities this is the cash flow of  The company generated from operations notice that this figure was $2.

9 billion do in 2022 and this  dropped all the way to $2. 4 billion by 2024 so the trajectory here is downward the second number to  pay attention here is the company's spending on Capital expenditures which it calls purchase of  property and Equipment this figure was just $1 billion in 2022 but it's increased to $1. 7 billion  in 2024 this is most likely to be money spent on building and opening new stores now with these two  key numbers in hand we can actually calculate this company's free cash flow if we subtract purchase  on property and equipment from cash FL operating activities we said that in 2022 this company was  generating $1.

8 billion in free cash flow but that dropped all the way to $600 Million by 2024 this  is a trend that is definitely not favorable for investors now once we know the company's free  cash flow the next number that I like to pay attention to is the debt balance notice that in  2022 the company wasn't doing much with its debt neither issuing it or really repaying it that  changed greatly in 2023 when the company issued almost $4 billion in new debt and it repaid about  $1 billion in debt that means that this company issued a net $3 billion in debt during this period  in 2024 we saw the company issue about $2 billion in total new debt but it also repaid about $2  billion in total debt so the company's debt balance didn't change much during 2024 now from  there the next number I pay attention to is what the company is doing with its stock in this case  in 2022 we see that the company bought back about $2. 5 billion in stock from its invest investors in  2023 the company bought back $2. 8 billion worth of stock from the public markets however the company  did not buy any stock back at all during 2024 now the fifth and final number that I pay attention  to here is the company's issuance of stock-based compensation we see that this number was $78  million in 2022 and it declined all the way to $51 million in 2024 now $51 million might sound  like a lot but when compared to $1.