Why should investors understand the Cash Flow Statement and the cash flow statement?

Cash Flow Statement is often overlooked by new investors who focus solely on the income statement. But in reality, cash flow is the blood that runs through a company—it tells you whether the business has enough actual cash to operate, pay debts, and grow, which is different from all the paper profits.

Why is the Cash Flow Statement more important than you think?

A company might report high profits, but if cash is flowing out faster than coming in, it will head toward bankruptcy regardless of what any board member says.

The difference among the three main financial statements is crucial for investors to understand:

Balance Sheet is a snapshot—showing assets, liabilities, and shareholders’ equity at a specific point in time. It’s like checking your bank account.

Income Statement tells the story of how successful the company has been in sales and controlling costs over a period. But profit figures may include non-cash items.

Cash Flow Statement is the real story—showing the actual cash inflows and outflows from operations, investing, and financing. These are the genuine numbers investors need to see.

What does a healthy Cash Flow Statement consist of?

When you open a cash flow statement, you’ll see cash divided into three main sections:

1. Operating Cash Flow — The Heartbeat of the Business

This is the cash generated from the core business activities. The company collects money from selling products, providing services, or charging fees, then pays for production costs, salaries, taxes, and other expenses. If this number is positive and increasing each year, it indicates the company is generating strong cash flow from its main operations.

2. Investing Cash Flow — Investing in the Future

This section shows cash used for investing in long-term assets or proceeds from selling them. Growing companies need to maintain and upgrade machinery, buy technology, and expand facilities. Negative numbers here are often good—they mean the company is investing in growth.

3. Financing Cash Flow — Raising and Returning Capital

This tracks how the company raises or repays debt, issues or repurchases shares, and pays dividends. If the company is consistently paying down debt and has negative cash flow here, it indicates financial strength.

What should a healthy cash flow statement look like?

Not all high numbers are good. Imagine—companies with large cash reserves just sitting idle might not be using their cash wisely to generate returns for investors.

What to look for:

First, analyze Operating Cash Flow. If it’s positive and trending upward, the company is genuinely generating cash from its core business. Be cautious of companies reporting negative operating cash flow, even if their overall cash position looks positive—this could mean cash is coming from asset sales, not operations.

Second, examine investing activities. Companies with consistent negative investing cash flow are often investing heavily in growth, which is usually a good sign. It shows they are strengthening their future.

Third, check financing activities. If this is negative, the company is paying down debt or buying back shares—signs of confidence. If it’s positive continuously, it might mean the company needs to raise funds frequently, which could be a red flag.

Microsoft: An example of a healthy cash flow

Let’s look at Microsoft from 2020 to 2023 as an example of what “correct” looks like.

The company’s operating cash flow increased from $60 billion to $87 billion in 2023. That’s a good sign—more cash generated from core operations each year.

Microsoft also reinvests about a quarter of its operating cash flow into long-term assets. This indicates prudent investment rather than reckless spending.

Interestingly, the company spends $40 to $50 billion on financing activities, mostly share buybacks. This shows they generate enough cash to return value to shareholders.

After subtracting investments, Microsoft’s free cash flow (operating cash flow minus investments) is around $50 to $60 billion. This allows the company to pay down debt, distribute dividends, and invest in new projects.

Summary: Cash Flow reveals the real story behind the numbers

The cash flow statement isn’t the only indicator, but it’s a vital tool for investors. The bottom line number—how much cash a company has—doesn’t tell the whole story.

You need to dig deeper: Where is the cash coming from? Is it from core business or asset sales? How is the company spending its money—investing for growth or just paying off debts? And what is the purpose of the cash outflows—long-term investments or short-term needs?

Once you learn to read the cash flow statement well, you’ll be better equipped to distinguish truly financially strong companies from those that only look good on paper.