Money Comin' In and Money Goin' Out: Understanding Cash Flow from Investing Activities
Investing Activities Cash Flow Explained:
Cash flow from investing activities (CFI) is a crucial part of a company's cash flow statement, dishing the dirt on how much dough's been made or spent on long-term, money-generating endeavors during a specific period. Investing activities? They're all about buying up physical goods, dabbling in securities, or selling off assets for the betterment of the company.
The SparkNotes Version
- Cash flow from investing activities represents investment-related activities on a company's cash flow statement.
- These activities include snagging physical assets, investing in securities, or offloading assets or securities.
- A company's cash flow from investing over the accounting period equals adding up the positive and negative investments listed on the cash flow statement.
CashFlowSplash – Cash Flow Statements 101
Businesses employ three essential financial statements: the balance sheet, income statement, and cash flow statement. The balance sheet lays it all out, giving you a glimpse of a company's assets, liabilities, and the owner's equity as of a certain date. The income statement dishes out revenue and expenses information for a specific timeframe.
The cash flow statement is the game-changer, bridging the gap between the income statement and the balance sheet by showing the cash generated or spent on operations, investing, and financing activities for a specific period. It's the ABCs (operations), XYZs (investing), and 123s (financing) of a company's cash dealings.
There are three sections available on the cash flow statement: cash flow from investing activities, cash flow from operating activities, and cash flow from financing activities.
Important Bits
Investing activities can produce either negative or positive cash flow. Spending cash on purchases results in negative cash flow, while making sales on those investments leads to positive cash flow.
Investing Activities: The Building Blocks of Growth and Capital
Cash flows from investing activities provide a breakdown of cash used in acquiring long-term assets (also known as non-current assets) that'll boost the company's value in the future.
Investing activity is a key player in the growth and capital scene. Any changes in property, plant, and equipment (PPE), a substantial line item on the balance sheet, are considered investing activities. To learn how much money a company spends on PPE, analysts and investors can check the sources and uses of funds in the investing section of the cash flow statement.
Capital expenditures (CapEx) are also found in this section. This popular measure of capital investment used in the valuation of stocks reflects how much a company invests in future operations. However, capital expenditures represent a reduction in cash flow. Companies with substantial capital expenditures tend to be in a growth phase.
Operating Activities and Financing Activities: The Yin and Yang of Cash Flow
In addition to cash flow from investing, there are two additional cash flow categories: operating activities and financial activities. Operating activities feature any incoming or outgoing cash connected with a company's day-to-day operations. Any cash spent or generated from the company's products or services is listed in this section. This may include cash from the sale of goods, interest payments, employee salaries, inventory payments, or income tax payments.
Money moves in the financing activities portion show the net cash flows linked to funding the company's operations. Financing activities include dividend payments, stock repurchases, or bond offerings that produce cash.
The Scoop
It's always a smart move to analyze the cash flow statement alongside the balance sheet and income statement to grasp a company's complete financial health.
Cash Flow Drama: A Look at Apple's Cash Flow Statement
Here's a sneak peek at the cash flow statement from Apple Inc., per the company's 10-Q report issued on Nov. 2, 2023[1]:
- Purchases of marketable securities for $29.52 billion (cash-flow negative)
- Payments for the acquisition of property, plant, and equipment for $10.96 billion (cash-flow negative)
- Proceeds from maturities of marketable securities for $39.69 billion (cash flow positive)
- Proceeds from the sale of marketable securities for $5.83 billion (cash flow positive)
The net cash flows generated from investing activities amounted to $3.71 billion for the twelve months ending Sept. 30, 2023, despite Apple spending nearly $30 billion on the purchase of marketable securities[1].
The differences between Negative Cash Flow and Negative Cash Flow From Investing Activities
In general, negative cash flow could be a sign of a company's poor performance. However, negative cash flow from investing activities may suggest that the company invested significant funds in long-term projects that lead to growth.
How Is Cash Flow From Investing Activities Calculated?
Suppose a company spent $30 billion on capital expenditures, most of which went towards fixed assets. It also purchased $5 billion in investments and spent $1 billion on acquisitions. The company realized a positive inflow of $3 billion from the sale of investments. To calculate the cash flow from investing activities, you'd add up these items, resulting in a negative cash flow of $33 billion.
The Bottom Line
The cash flow statement is one of the three financial reports that a company generates in an accounting period. The cash flow from investing activities section of the cash flow statement can either be positive or negative. Negative cash flow from investing may indicate that the company is investing in assets or long-term development activities vital to the health and continued operations of the company.
- The cash flow statement, one of three essential financial statements, showcases the cash generated or spent on operations, investing, and financing activities for a specific period, providing a comprehensive view of a company's cash dealings.
- Investing activities on the cash flow statement can produce either positive or negative cash flow, and they include acquiring physical assets, investing in securities, or offloading assets or securities.
- Cash flows from investing activities provide a breakdown of cash used in acquiring long-term assets, helping analysts and investors understand how much a company spends on property, plant, and equipment, a key line item on the balance sheet, during a specific period.
- Companies may also include capital expenditures in the investing section of the cash flow statement as a measure of capital investment used in the valuation of stocks. However, capital expenditures represent a reduction in cash flow.
- Understanding the specifics of a company's cash flow from investing activities, alongside analyzing the balance sheet and income statement, is essential for assessing a company's complete financial health. Negative cash flow from investing may indicate the company is investing in long-term projects that can lead to growth.
