Novice Investing - Cash Flow 101

Date: Friday 05th 2008f September 2008 05:48:07 PM

Cash Flow 101 - 10/18/2005

By: Hari Wibowo

Cash flow is the lifeblood of any company. What is cash flow? Cash Flow is the actual movement of cash in and out. Positive cash flow implies that a company is taking in more cash than it is paying out. In investing, the overall goal of a company is to have a positive operating cash flow. This is not just any kind of cash flow. There are actually three kind of cash flow that is commonly used; Operating Cash Flow, Investing cash flow, Financing Cash Flow. Let's go through these one by one.

Operating Cash Flow. As the name implies, this is the cash flow generated based on the company's business activities. This varies among companies. For bank, their primary activities is to lend money. For retails, their primary business activity is to sell items on the store. As a guide, we want companies to have positive operating cash flow because that is the primary reason why they exist.

Investing Cash Flow. This is the cash flow that is obtained from investing activities. It include the purchase or sale of long term asset or interest income generated from the purchase of long-term asset. Generally, we want this number to be negative. This implies that the company is using its cash to invest for the future. Hopefully, investing in long-term asset will yield higher operating cash flow in the future.

Financing Cash Flow. This is the cash flow obtained from financing activities conducted by the company. Financing include borrowing loan from banks and selling stocks to the general public. As a guide, we want this number to be zero or negative because we do not want a company to depend on loans to increase their money in the bank. Negative financing cash flow indicates that a company is paying its debt or buying back its stock.

The statement of cash flow can be obtained in many financial publications, including Yahoo! Finance. Here is a summary of Altria Group (MO) quarterly cash flow from Yahoo! Finance. For the quarter ended in June 2005, Altria has a positive operating cash flow of $ 5.55 Billion, negative investing cash flow of $ 2.11 Billion and positive financing cash flow of $ 1.25 Billion.

To summarize, we prefer to invest in a company that has positive operating cash flow, negative investing cash flow and negative financing cash flow. Next time, I will talk more about operating cash flow, which is the most important of all.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Altria Group Inc. (MO) or any other securities.

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