Where's the cash going?

We’re down to the last two financial statements, Statement of Cash Flows and the Retained Earnings Statement.

The statement of cash flows shows where the business got its cash during a particular period of time and how that cash was used.

The retained earnings statement shows how much previous income was distributed to shareholders in the form of dividends and how much was kept to allow for future growth.

The statement of cash flows is useful for answers questions like:

1. Does the company generate enough positive cash flow from operations to stay in business?
2. Can the company pay its debts?
3. Will the company be able to pay its usual dividend?
4. Why is there a difference between net income and net cash flow for the year?
5. Will the company need to borrow money to make needed investments?

The statement of cash flows is broke up into 3 categories:

1. Operating Activities: this includes net income, depreciation, changes in current assets and liabilities other than cash, short-term investments, and short-term debt.
2. Investing Activities: this includes investments in or sales of fixed assets.
3. Financing Activities: this includes raising cash by selling short-term investments or by issuing short-term debt, long-term debt, or stock.  Dividends paid and cash used to buy back outstanding stock or bonds also reduce cash and are listed in the statement of cash flows.

Using ABM Industries, Inc. (ABM) from the Samurai Fund at FinancialSamurai.com as an example we see they have a positive cash flow with a Change in Cash and Cash Equivalents of $7,412 (as always these numbers are reported in the millions).

Their cash flow from Operating Activities was $140,871, more than twice as much as was reported the previous year.

Cash flows from Investing Activities was ($37,467), and we see they made investments in capital but a fraction of what they had in previous years.

Cash flows from Financing Activities shows ABM paid more out in dividends than in previous years but had Total Cash Flows from Financing Activities of ($95,992).

The difference between their total cash outflows and total cash inflows is $7,412, a tremendous improvement from the ($135,482) they reported a year earlier.  So we’ve discovered ABM has increased its dividends, increased total cash flow from operating activities, and has a positive cash flow, all good signs to an investor.

Information on Retained Earnings is summarized on the balance sheet and was $512,476 for the last reporting period, up from $485,136 from the previous year.  Retained earnings represent a claim against assets and are not actually an asset for the company.  ABM can’t use this money for the payment of dividends or anything else.

If you’re having trouble locating the Statement of Retained Earnings it’s also known as the Equity Statement or Statement of Retained Earnings and Stockholder’s Equity.  Retained Earnings can be reported in the balance sheet, in a combined income statement, or as a separate schedule.

There’s obviously a lot more that goes into analyzing a company’s financial performance but I think we’ve covered all the major things.  In a future series of articles we’ll discuss technical analysis of a company’s stock price, and what you can tell about their performance from looking at their stock chart.

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