Why are cash flows important while evaluating a company? When we read business media, 95% of the time, if not more, the numbers discussed about companies are sales, profits, margins, and growth in these numbers. 1/6
And while these are extremely important, remember that the reality check for any company happens at a cash flow level. A company may be selling lots of stuff at profitable margins, but if the customers are not paying on time, there is trouble coming along. 2/6
If inventories are piling, there could be an issue. If a company is pursuing a large capex, funded with borrowings, there could be an issue in the future. The P&L is not going to reflect these. A look at the cash flows, and you will realize if something is wrong. 3/6
And all we need to do is to look at trends in the 3 headline cash flows - Cash from Operations (CFO) - Cash from Investing Activities (CFI) - Cash from Financing Activities (CFF) For example, a company seeing profits grow but CFO decline is seeing working capital issues 4/6
A company showing large negative CFI (capex) and large positive CFF(Borrowings) is funding capex through large borrowings. If the company is unable to have large CFO in future - the Assets will have to be sold to repay the borrowings. Look at the cash flows below 5/6
In a nutshell, just following the headline cash flow numbers can give a lot more financial insight about the company, than what the P&L gives. Follow these closely 6/6
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