Fundamental Analysis For Dummies, 2nd Edition

Chapter 7

Tracking Cash with the Statement of Cash Flow

IN THIS CHAPTER

Discovering the key parts of the statement of cash flows

Understanding how the statement of cash flows can give you a picture of a company’s finances

Digging into why a company’s cash flow can be more telling than monitoring its earnings

Figuring out how to monitor a company’s free cash flow and cash burn rate

“Show me the money!” Profits and assets are great. But there’s something comforting to investors and fundamental analysts like about cold, hard cash. That’s where the statement of cash flows comes in.

Accounting rules can become so convoluted it’s hard to simply see how much cash a company is bringing in the doors. You might read through a company’s income statement and balance sheet and feel as if you have a pretty decent understanding of how the company is doing and what it owns. But revenue and profit are just numbers on a financial statement. It’s cash that really matters. It’s cash that pays the bills.

The statement of cash flows, or cash-flow statement, is all about showing you the money. The statement meticulously tracks the flow of actual cash in and out of a company. There’s nothing more reassuring than knowing a company is bringing in cash, not just playing accounting games with the income statement.

Fundamental analysts revel in the brutal honesty of the cash-flow statement. And while the statement has its limitations, in this chapter you’ll find how tracking the cash flowing in and out of ...