About this video
- Video Title: Cash Flows Explained
- Channel: The Plain Bagel
- Speakers: Richard Coffin
- Duration: 00:10:25
Overview
This video explains the concept of cash flow statements, differentiating them from income statements. It details the three main categories of cash flow (Operating, Investing, and Financing) and introduces Free Cash Flow. The purpose is to educate viewers on how to analyze a company's true financial health by looking beyond reported earnings.
Key takeaways
- Cash Flow vs. Earnings: While income statements report earnings, cash flow statements track actual cash movement, providing a more straightforward and often more reliable picture of a company's financial health. Non-cash items on the income statement can obscure a company's true performance.
- Three Main Cash Flow Categories:
- Cash from Operating Activities (CFO): The most important category, reflecting cash generated from a company's core business operations (sales minus expenses, interest, and taxes). A consistently high and growing CFO indicates a healthy business.
- Cash from Investing Activities (CFI): Involves the purchase or sale of long-term assets like property, plant, and equipment. Typically negative for growing companies as they invest in their future, but can be positive if assets are sold.
- Cash from Financing Activities (CFF): Relates to how a company raises capital and repays it, including issuing or repaying debt, issuing stock, share buybacks, and dividend payments. A positive CFF indicates the company is raising money, while a negative CFF means it's returning money to investors or creditors.
- Free Cash Flow (FCF): Calculated as CFO minus capital expenditures (money spent on long-term assets). FCF represents the cash a company has left after funding its operations and investments, available for dividends, debt repayment, or acquisitions. Strong FCF indicates financial flexibility.
- Importance of Cash Flows: Analyzing cash flows helps investors assess the quality and sustainability of a company's earnings. A significant difference between reported earnings and operating cash flow can be a red flag, suggesting potential earnings inflation.
