Analyzing Statements of Cash Flows

SCF can help you analyze a company's:

1. Relationship between net income and net cash flow from operations (OCF)

         If net income is positive but OCF is negative that could mean that the company is growing rapidly or a       financial mismanagement.

   

     2. Net cash flow from investing activities (ICF)

          If negative the company is making investments in plant & equipment or another company's stock (strategic reasons, venture, etc)

          If positive, company is liquidating assets, usually due to financial distress

      3. Does the company have sufficient cash to pay dividends?

          OCF should exceed dividends.

          If dividends exceed OCF:

               -Company liquidated assets to pay dividends?

               -Company issued equity or borrow to pay dividends?

          Neither situation is good.