Lesson 1 of 5 · 13 min
Evaluating sources and uses of cash
Read a cash flow statement in four steps: first the big picture of where cash comes from and goes, then the drivers inside operating, investing and financing activities.
In short
- Step 1: identify the major sources and uses of cash across operating, investing and financing activities. Step 2: operating drivers. Step 3: investing drivers. Step 4: financing drivers.
- For a mature company, operating activities should be the main source of cash, and CFO should cover capital expenditures.
- A growth-stage company can run negative CFO for a while as it builds inventory and receivables, but this cannot last.
- For a mature company, CFO is normally above net income because of non-cash charges. Large earnings with weak CFO can signal poor earnings quality.
- In investing and financing, ask what each line is, where the money for big investments came from, and why assets are being sold or capital raised or returned.
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