Lesson 27

Read a Cash Flow Statement

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Lesson 27 Objectives


Lesson Objective 1: Evaluate the Cash Flow Statement of four real companies


Lesson 27 Executive Summary

In this lesson we learn how to apply what we learned in the previous lesson about the cash flow statement:


  • Operating activities (Look for a high positive number)
  • Investing Activities (Look for a negative number)
  • Financing activities (Look for a negative number)

  • All providers of financial information are showing the cash flow statement for listed companies. Using MSN money it is explained how to read Walmart’s and three other companies’ cash flow statement. The video further teaches us an elaboration on more detailed pointers to look for:


  • If trending and stability of the respective cash flows is positive or negative for your as an investor
  • If you as an investor like the distribution of earnings flowing back to you from either dividend, a company share repurchase program, or a combination
  • If a sale of assets, increasing investing activities, has influenced earnings in the following years

  • The cash flow statement shows the health of the company and if it is trending in the right direction. It is important to remember that the cash flow statement is only telling one side of the story. Even a healthy cash flow statement does not disclose other very relevant information like the value of the company or the total amount of debt that the company is financed by.


    The simplest way to get the required knowledge of the cash flow statement, and how it relates to the income statement and the balance sheet is to grab Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson. Aside from being a top authority in raising capital; Ittelson’s book provides the best and simplest examples for the beginner. I have personally read this book and continually reference it for help.

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    Read a Cash Flow Statement - Lesson Transcript


    Before anything else, please know that you need to refer to the video while you read this in order to understand fully.


    On the left side of the video is the slide from the very last lesson we just did to remind you of the cash flow statement. We will study the each cash flow statement of 4 different companies: Walmart, Sears, Intel, and Kodak.


    Let’s do Walmart first. Open MSN Money and type in the ticker for Walmart, which is the W-M-T. You can see the different information for Walmart. All these are extracted from the income statement, the balance sheet, and the cash flow statement.


    Go to the bottom and click the cash flow statement. You’ll find two options – annual and interim. Click the button to take you between the two. Every 3 months, the information updates. If you just want to look at the annual which is every year, click on it.


    The statement is a whole lot more numbers than what I demonstrated on the left side of the video. The premise of the sheet is exactly the same. As you look at the first bold line of information, will see cash from operating activities. There are numbers fairly profound for Walmart. These are in millions. That’s all the money flowing into Walmart. This is how much they generate for their operating activities.


    The next bold line is cash from investing activities. Negative numbers should be here, because they are investing in more supplies, stores, or other businesses. In 2008, they generated 20.6 billion dollars.

    The next segment, investing activity, Walmart invested 15.6 billion of that 20.6 billion. That's a substantial portion of the money being put directly back into the business. In 2012, they generated 24.2 billion and invested 16.6 billion.


    The last line is the financing activities. In 2008, Walmart paid 7.4 billion dollars. This is where you can draw down and look at the individual line that make up that financing activity. 3.5 billion of that financing activity went to paying dividends. Since it is a negative number, it’s the money flowing out of the business to the shareholders. The shareholders then receive 3.5 billion dollars in dividend payment.


    The next number is the issueance or retirement of stock. A negative number means Walmart is buying back their shares. They are not issuing them. If you're holding shares of this company, Walmart makes your shares more valuable. 7.6 billion dollars were spent buying back their own shares. Those trends continued through the next 5 years. It's always a negative number. The net change in cash changed by negative 2 billion dollars, positive 1.7, positive .6, negative .5, and negative .8. The cash flow statement shows the total cash at the beginning and the end of that term. Walmart has been sitting on 5.5 billion dollars in cash, 7.2, 7.9, 7.3, and 6.5. Generally, Walmart has been keeping 7 billion dollars in hand so they have that for the rainy day fund or for them to be able to acquire another company or whatever they plan on using that money for. It's like you having money in a checking account that you can use for that rainy day or an emergency money. That’s what it’s like for Walmart. This is a strong cash flow statement.


    Whether or not you’re investing in a company like this, dig in the income statement and figure out how much their equity is growing, and other things we learned course 2 unit 3. The cash flow statement shows the health of the company. Walmart is in the right direction.


    Now here’s an example from Sears Holding Corp. The ticker is S-H-L-D. This is opposite of Walmart. Just like Walmart, go down Sears and click on the cash flow statement. Just look at the annual cash flow statement! It’s terrible! The operating activities need positive numbers. In 2008, it was trending down until 2012! It’s horrible!


    The cash for the investing activities show -.4, -.6, -.1, -.4, -.3. It’s remained neutral. They have been investing pretty much the same thing. That’s a fairly standard number.


    The financing activity, in 2008, they were paying off a lot of debt. They were buying lots of stocks back. They slowly started to decline and they're actually ignoring debt now. The numbers are trending in the wrong direction. Sears is a company that’s going though difficult times.


    Now let’s look at Intel. The ticker is I-N-T-C. Go to the cash flow statement. The operating activities go from 12, 11, 10, 16, 20 billion. These are nice positive growth. The investing activities are consistent – -9, -5, -7, -10, -10 billion. They’re using lots of that capital that they’re producing to invest back in the business and also buying other types of assets. Their financing activity is growing tremendously. They're buying back all kinds of shares. In 2011, they bought back 12 billion dollars worth of their shares. I’d personally prefer dividends, but this is another method for them to put more money in your pocket.


    Let's check a bad cash flow estimate of Kodak. Its’ E-K-B-K-Q. You’ve heard they're going through rough times and about to fall into bankruptcy. This is an example of a really poor cash flow statement. The numbers are all trending on the operational activities in a negative direction. This is not what you want in a business! The investing activities completely fizzle out! They sold lots of their assets in 2007 and the following year, the net income went negative. You would’ve known something was up right there in 2007 when they started selling assets. For the financing activities, the positive numbers are really bad! That means they're taking a a bunch of debt!


    As you’ve seen from the 4 companies, you now know better. You know where to invest and where not to. You don’t want to be trending in the opposite direction, don’t you?


    In this lesson we learn how to apply what we learned in the previous lesson about the cash flow statement:


  • Operating activities (Look for a high positive number)
  • Investing activities (Look for a negative number)
  • Financing activities (Look for a negative number)

  • All providers of financial information are showing the cash flow statement for listed companies. Using MSN money, it is explained how to read Walmart’s and three other companies’ cash flow statement. The video further teaches us an elaboration on more detailed pointers to look for by observing the 4 companies:


  • If trending and stability of the respective cash flows are positive or negative for you as an investor
  • If you as an investor like the distribution of earnings flowing back to you from either dividend, a company share repurchase program, or a combination
  • If a sale of assets, increasing investing activities, has influenced earnings in the following years

  • The cash flow statement shows the health of the company and if it is trending in the right direction. It is important to remember that the cash flow statement is only telling one side of the story. Even a healthy cash flow statement does not disclose other very relevant information like the value of the company or the total amount of debt that the company is financed by.


    The simplest way to get the required knowledge of the cash flow statement, and how it relates to the income statement and the balance sheet is to grab Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas R. Ittelson. Aside from being a top authority in raising capital; Ittelson’s book provides the best and simplest examples for the beginner. I have personally read this book and continually reference it for help.