Cash Flow Statement: An Introduction
A Cash Flow Statement is a visual representation of what happened to a company's cash during a specific time period, basically, it is a financial statement that shows how much cash and other liquid assets enter and leave a business.
For any trader/Investor, information is the backbone and the Cash Flow Statement proves to be a mine of information.
It consists of three categories:
Cash from Financing Activities:
Transactions dealing in debt, stock, and dividends are all examples of financing operations. Cash flow from this sector is the cash flow that is utilized to fund the firm. It also includes comprises funds received from investors or banks, as well as cash distributed to shareholders.
Cash from Investing activities:
As the name suggests it encompasses all cash sources and uses from a business's investments. Cash from investments is linked to changes in infrastructure, technology, assets, or investments. This includes the assets which are focused on producing profit in the future.
Cash from Operating activities
This category shows the amount of money a firm makes from its usual business operations, such as making and selling things or providing a service to clients. It only includes cash flow from the main forte of the business. This section lists any money spent or earned by the company's goods or services.
Cash Flow Ratios
You must be familiar with different financial ratios related to the Balance Sheet and Profit and Loss statement. In a similar fashion, Cash Flow Statement has its own unique Ratios depicting different facts related to companies’ performance in a specific time period.
Cash flow ratios are used to correlate cash flows to other financial statement parts. They are a necessary component of any analysis aimed at determining a company's liquidity.
A Cash Flow Statement is a visual representation of what happened to a company's cash during a specific time period, basically, it is a financial statement that shows how much cash and other liquid assets enter and leave a business.
For any trader/Investor, information is the backbone and the Cash Flow Statement proves to be a mine of information.
It consists of three categories:
Cash from Financing Activities:
Transactions dealing in debt, stock, and dividends are all examples of financing operations. Cash flow from this sector is the cash flow that is utilized to fund the firm. It also includes comprises funds received from investors or banks, as well as cash distributed to shareholders.
Cash from Investing activities:
As the name suggests it encompasses all cash sources and uses from a business's investments. Cash from investments is linked to changes in infrastructure, technology, assets, or investments. This includes the assets which are focused on producing profit in the future.
Cash from Operating activities
This category shows the amount of money a firm makes from its usual business operations, such as making and selling things or providing a service to clients. It only includes cash flow from the main forte of the business. This section lists any money spent or earned by the company's goods or services.
Cash Flow Ratios
You must be familiar with different financial ratios related to the Balance Sheet and Profit and Loss statement. In a similar fashion, Cash Flow Statement has its own unique Ratios depicting different facts related to companies’ performance in a specific time period.
Cash flow ratios are used to correlate cash flows to other financial statement parts. They are a necessary component of any analysis aimed at determining a company's liquidity.
- These Ratios include
Cash Flow Coverage Ratio
Cash Flow Margin Ratio
Current Liability Coverage Ratio
Price to Cash Flow Ratio
Cash Flow to Net Income
A) Cash Flow Coverage Ratio
It gives a basic overview that how well, the cash flow from activities might be used to pay down debt or cover present costs.
Operating cash flows are split by total debt to arrive at this figure. This ratio should be as high as feasible, indicating that an organization's cash flow is sufficient to cover scheduled debt principal and interest payments.
B) Cash Flow Margin Ratio
It reveals how successfully a business transforms sales into cash. This is a very useful and crucial profitability ratio since costs and asset acquisitions are paid in cash.
Cash flow margin ratio analysis is critical for businesses to understand since it provides insight into their profitability.
Operating Cash Flow Margin = (Net Income + Non-Cash Expenses (Amortization and Depreciation) + Change in Working Capital) / Sales
C) Current Liability Coverage Ratio
The current liability coverage ratio determines how much cash a company has on hand to pay down its debts. This calculation determines how much money it must pay over the course of a fiscal year or an operational cycle.
Cash flows from activities are divided by current liabilities to arrive at this figure. If this ratio is less than 1, a company is not producing enough cash to meet its immediate commitments and is at risk of going bankrupt.
D) Price to Cash Flow Ratio
The worth of a stock's price in relation to its operating cash flow per share is measured by a stock valuation indicator or multiple. The price to cash flow ratio is significant because it indicates how valuable a company is at any particular time.
The operational cash flow per share is calculated by dividing the share price by the operating cash flow per share. A lower price to cash flow ratio is preferable since it indicates that the stock's value will most likely rise.
E) Cash Flow to Net Income
It describes the amount of cash earned through operating operations. A ratio close to 1 suggests that a business is not using accounting gimmicks to artificially boost revenues above cash flows.
It's computed by subtracting depreciation and other non-cash costs from net income, as well as changes in current assets and current liabilities.
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