Why should you pay more attention to Microsoft's cash flow statement than the income statement?

Let’s take a look at Microsoft from 2020 to 2023. The company’s operating cash flow increased from $60 trillion to $87 trillion respectively. This figure indicates an important message: the company not only reports high profits on paper but also has real cash flowing into its operations. This is why investors need to analyze the cash flow statement carefully alongside other financial statements.

What is the Composition of the Cash Flow Statement?

Cash Flow Statement is not just the final number showing how much cash the company has left, but it illustrates the movement of money throughout the entire system. The cash received and paid out by the company is divided into three main channels:

1. Operating Cash Flow (Operating Cash Flow)

This is the cash generated from selling goods, services, or the company’s main income sources, and the cash paid for production costs, wages, taxes, and routine operating expenses. If this number is positive and increasing, it indicates the company is generating revenue efficiently.

2. Investing Cash Flow (Investing Cash Flow)

This refers to cash received from selling assets (such as land, equipment) or cash spent on purchasing new assets like machinery, technology for long-term competitiveness. This is analyzed indirectly because a negative cash flow (due to heavy investments) might be a good sign that the company is preparing for growth.

3. Financing Cash Flow (Financing Cash Flow)

This involves borrowing, issuing shares, paying off debt, or share buybacks. It helps to see where the company sources its funds from and how much it returns.

Comparing the Cash Flow Statement with Other Financial Statements

When analyzing financial statements, investors need to understand the difference between Balance Sheet (Balance Sheet), which shows assets, liabilities, and equity at a specific point in time, and Income Statement (Income Statement), which reports performance over a period.

The Cash Flow Statement tells a different story. It shows the actual inflows and outflows of cash. A company might report high profits but lack sufficient cash to cover expenses, or vice versa. Therefore, the cash flow statement is a crucial tool in Fundamental Analysis to select companies with genuine potential at a reasonable price.

What are Good Signals from the Cash Flow Statement?

Many think that a high cash flow number is always good, but investors need to analyze more deeply.

First, check the source of the cash. If most of the cash comes from operating activities, not from selling assets or borrowing, it indicates the cash is generated from the company’s core operations—this is a sustainable sign.

Second, look at cash usage. If the company continuously invests in machinery and technology (negative investing cash flow), it suggests the company is preparing for long-term competition.

Third, examine how the company finances itself. If the company has negative financing cash flow (pay more than borrow), it indicates a strong financial position, not relying on new financing.

Study of Microsoft: A Practical Example

From 2020 to 2023, Microsoft shows a significant pattern:

Operating Cash Flow remains high and steadily increasing. This figure is derived from Net Income from Continuing Operations, reflecting the company’s genuine revenue-generating ability.

Investments by Microsoft increased year over year but remained proportionate (about 1/4 of operating cash flow). This indicates reasonable investments without overextending.

An interesting point is that Microsoft’s financing activities generate around $40-50 billion, mostly from share buybacks (Share Buyback), rather than additional borrowing.

Ultimately, Microsoft maintains a Free Cash Flow (cash flow available after investments) of $50-60 billion, demonstrating strong financial health.

Summary: Why is the Cash Flow Statement Important for Investment Decisions?

The Cash Flow Statement is a window for investors to see the real cash moving within the company. It’s not just the bottom-line figure but requires a deeper look into:

• Where the cash comes from (operations, asset sales, or borrowing)
• What the cash is used for (growth investments or debt repayment)
• How much cash remains for future circulation

By studying the cash flow statement thoroughly, investors can make smarter investment decisions, better assess the company’s quality, and choose the right timing for long-term investments.