Why is the cash flow statement a tool for finding truly investable value stocks?

Many investors closely follow the income statement, but few delve into analyzing the cash flow statement, even though cash is the safest indicator for assessing a company’s health. Today, we will explore how important the Cash Flow Statement is and how to read it to avoid falling into traps.

The Three Financial Statements: Knowing the Identity of Each

To evaluate a company systematically, investors need to understand the fundamental differences between the Balance Sheet (Balance Sheet), Income Statement (Income Statement), and Cash Flow Statement (Cash Flow Statement). These three reports may seem to tell the same story, but if you look more closely and deeply, you’ll find that each narrates a completely different story.

Balance Sheet is a snapshot of the financial position at a specific point in time, showing how much assets, liabilities, and equity remain. It does not tell the story of changes over time.

Income Statement reports the operational results over a period—whether a year, quarter, or half-year—showing how much profit or loss the company generated. The problem is, companies can manipulate these figures through different accounting methods.

Cash Flow Statement is harder to falsify because it shows the actual cash inflows and outflows, how they move over time, and in what amounts. These three financial statements are interconnected and should be read together for a complete picture.

What is the Cash Flow Statement: A Clear Definition

The Cash Flow Statement records the inflow and outflow of cash within a business over a specific period, similar to tracking the salary deposits and expenses flowing in and out of your bank account.

The difference is, the cash flow statement doesn’t just show the net ending cash balance; it also details the pathways of cash—where it comes from and where it goes. This is what gives investors confidence.

The cash flows are categorized into three main sections:

1. Operating Activities Cash Flow (Operating Cash Flow)

This is the core of analysis because it shows how much cash the company truly generates from its core business, not from selling assets or borrowing.

For example, a company sells products to customers and receives cash, but must also pay cash for raw materials, employee wages, and taxes. The cash flow statement will show the net cash remaining from these activities.

2. Investing Activities Cash Flow (Investing Cash Flow)

Sometimes, the company purchases assets, machinery, or invests in other companies—these are cash outflows. Other times, the company sells old assets—these are cash inflows. This section tells the story of the company’s investments.

3. Financing Activities Cash Flow (Financing Cash Flow)

The company may issue debt, issue shares, or borrow money—all of these are cash inflows. Conversely, it may repay debt, buy back shares, or pay dividends—all of these are cash outflows.

What Should We Look for in the Cash Flow Statement

Misconception: More cash = Good

Don’t believe that. A company with a large amount of cash on hand might indicate it cannot or does not want to invest or expand its business. Similarly, negative cash flow isn’t always bad—if the company invests for long-term growth, it can be a positive sign.

What to analyze seriously

Check the source: Is the cash that makes the cash flow statement positive coming from operating activities? This is very important because:

• If from operating activities = the company is generating genuine cash flow from its core business (Good)
• If from asset sales = a one-time cash boost that may soon run out (Be cautious)
• If from borrowing = money that needs to be repaid with interest (Negative in the future)

Analyze cash flows from investing activities: Growing companies often need to invest continuously. Negative cash flow from investing activities can be good if it’s for investments that build future growth.

Monitor financing activities: If the company needs to continually raise funds, it might indicate that cash flow from operations isn’t sufficient.

Case Study: Microsoft

Looking back at Microsoft’s cash flow statements from 2020 to 2023, we see quite positive data:

Cash flow from operating activities increased from $60 billion to $87 billion. This growth genuinely comes from the company’s operations, not tricks.

Cash flow from investing activities remains negative because the company invests in machinery and infrastructure. However, this amount has increased year over year, indicating a commitment to expansion.

Interestingly: Microsoft has negative cash flow from financing activities of $40-50 billion annually, because it uses its strong operating cash flow to buy back shares. This demonstrates confidence in itself and a way to return value to shareholders.

Ultimately, Microsoft has a Free Cash Flow (Free Cash Flow) in the range of $50-60 billion, reflecting solid financial strength.

Summary: Why is the Cash Flow Statement an Essential Tool

The Cash Flow Statement is not just a number; it tells the story of the business—whether it is strong, disciplined, and has a clear direction.

When investors read the cash flow statement carefully and ask questions: Where does the money come from? Where does it go? Why does it go there? The answers reveal deeper insights than just the headline figures. This is the foundation of (Fundamental Analysis)—a deep and reliable analysis that opens the door to selecting companies with long-term investment potential.