This is the third and final part of understanding financial report of a company called Cashflow report. You can catch up with the first part here and the second part here. Knowing the full part of the report can help us to find which companies have good fundamental performance so we can invest our money later and avoid fishy reporting that some companies may attempt to. Go check it out!
Operating Cashflow
The first and most important part of this Cashflow report is what we called Operating cashflow. This part shows where the company makes money from. Ideally, operating cashflow should be positive and show good growth year over year. The other thing we need to check is if the Revenue (from the Profit and Loss report) is contributed mainly from the Operating cashflow. I can’t mention the proportion but logically speaking, if we have coffee shop we should want to get most of our money from the coffee or the snacks and not from the parking fee right? Having good growth in Operating cashflow shows company generate revenue from its core business and not by selling its assets or other supporting business.
Investing Cashflow
Another part of this report is the Investing part. Similar to us who wants to progress further in life, we also need to make some investments in ourselves right? be it reading a book, learning new skill, etc. Same principle also applies to business. Companies need to invest wisely to keep it relevant. In our coffee shop example, we may want to invest in purchasing new equipment, send our employees to training, or even opening a new branch. Ideally, the report should show negative amount in Investing, since it shows the money comes out from the company. We should be cautious if the amount in this part is positive, this means company needs to sell some of its assets to get some money and not investing it back immediately. In normal case, company sometimes need to let go of its unproductive or old assets but this amount should not exceed the total investment, meaning the final amount will still be negative.
Financing Cashflow
The last part of this report is Financing part. In ideal condition, we would want to have this part in negative value. Why? Because this shows the company are paying its loan, or the company pays its dividend to the shareholders. So again, the money comes out from the company for a good cause in general. In quarterly basis, the numbers here may be positive since the company may need to get a loan to expand further. But in annual basis, we should avoid company who adds more debt every year with no sign of showing good effort to pay it back. In the Balance Sheet report, we can get the numbers from Short Term and Long Term Liabilities to get a glimpse of the Loan Ratio a company has.
Closing
There you have it. All three parts of Financial Report that the public companies follow as part of regulation. If they fail to submit this in time, then authorities has the right to remove them from the publicly listed company. This is also what makes investing in stocks is exciting since many aspects are transparent and publicly available. Of course, these posts are just basic. We will need to dig deeper once we picked the company we will invest to understand which line of business contributes the most to the Revenue, are they opening new line of business, how are each segment growing, who are the suppliers – are they still affiliated with the company, etc.
Hope you can find this post useful and see you in my next post!
Reza Brianca - My Legacy 