Cash Flow Statements

In addition to the Income Statement, the Balance Sheet, a Cash Flow Statement is another financial statement that tells you if a company might be worth investing. 

Essentially, a Cash Flow Statement tells you where all the company's operating profit goes (e.g. dividend payments to share holders, share buybacks, paying off debt...etc), and if the company needed to raise any additional money to make ends meet (by issuing new shares or bonds). It also shows you if the company has reinvested cash back into the business or if the company has other sources of income such as from investments in other companies (making it a holding company).

Cash Flow Statements mainly have 3 sections:

- Operating Activities (money generated from different income sources)

- Investing Activities (money spent on assets or investments)

- Financing Activities (issuance of shares or bonds, debt paid off, dividends)

Operating Activities should be a positive number, and hopefully growing each year.

Investing Activities should be negative, if it's positive it means the business actually SOLD assets which might affect future earnings.

Financing Activities should also be negative, showing that the company is paying dividends, buying back shares when sensible to do so and paying off debts.

Net Cash is not a particularly useful number on its own as it's how the cash is being used that's more important. However, it is a good idea for the company to keep some amount of net cash at all times to deal with emergencies.

Preston Pysh also included some useful examples of going through some real Cash Flow Statements: