Cash flow statement interpretation

 

Interpreting a cash flow statement helps you understand how a company generates and uses cash over a specific period. It’s one of the core financial statements alongside the income statement and balance sheet. Here's a breakdown of how to interpret it:

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🧾 Structure of a Cash Flow Statement

It is divided into three main sections:

1. Cash Flows from Operating Activities (CFO)

This section shows cash generated from the core business operations.

Includes:

• Net income (from the income statement)

• Adjustments for non-cash items (depreciation, amortization)

• Changes in working capital (accounts receivable, inventory, payables)

✅ Positive CFO = healthy core operations
🚫 Negative CFO = operations are not generating enough cash

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2. Cash Flows from Investing Activities (CFI)

This includes cash used for or generated from investment in long-term assets.

Includes:

• Purchase/sale of property, plant, and equipment (PPE)

• Purchase/sale of investments or subsidiaries

📉 Negative CFI = company is investing in growth
📈 Positive CFI = may indicate selling assets or reduced investment

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3. Cash Flows from Financing Activities (CFF)

This involves cash transactions related to raising or repaying capital.

Includes:

• Issuing/repaying debt

• Issuing/buying back shares

• Paying dividends

📊 Positive CFF = raising funds
📉 Negative CFF = repaying loans, buying back shares, or paying dividends

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📌 Key Insights from Interpretation

Indicator	What to Look For	Interpretation
🔄 Net Cash Flow	Sum of CFO + CFI + CFF	Indicates overall cash position change
💰 Free Cash Flow (FCF)	CFO—Capital Expenditures	Shows cash available for dividends, expansion, debt repayment
🏦 Cash Balance Change	Beginning vs. Ending Cash	Reflects the company’s liquidity change
🚦 Trend Over Time	Multiple periods comparison	Are operations consistently generating cash?

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🧠 Example Interpretation

Imagine a company has

• CFO: ₹500 crore (positive)

• CFI: ₹(300) crore (negative)

• CFF: ₹100 crore (positive)

• Net Cash Flow = ₹500 - ₹300 + ₹100 = ₹300 crore

Interpretation:

• Strong operating performance (positive CFO)

• Investing in assets (negative CFI = growth strategy)

• Raised financing (positive CFF = likely took a loan or issued shares)

• Overall, cash increased—a healthy cash position

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🧭 Red Flags to Watch

• Consistently negative CFO: Business model may be flawed.

• Large positive CFI from selling assets: Could be asset stripping to stay liquid.

• High debt issuance in CFF: Indicates reliance on external funding.