What is Cash Flow and why is important?
Cash flow refers to the movement of money in and out of a company. All companies produce a cash-flow statement, which contains details of every single payment done during the previous year. A cash-flow statement is very useful for investors, as it shows clearly where profits are generated.
It can be used to work out whether or not the company is generating enough cash to cover its costs and, if it is, you can see if it is expanding too quickly and spending too much of its money on acquisitions or whether it is managing its growth with prudence.
In contrast to a balance sheet statement, which gives a picture of a company’s assets, liabilities and shareholders’ equity at a given moment in time, a cash-flow statement shows inflows and outflows over a given period of time. The bottom line of a cash-flow statement shows the net increase or decrease in cash for the period. In general, cash-flow statements are divided into three main parts, which show flows from operating activities, investing activities and financing activities.
In the US, this is sometimes called cash earnings, from which one can calculate cash earnings per share.
Category: Financial Glossary