Thread by @IAmOanaLabes

Do you Know the 5 Types of Cash Flow and How to Use them?

They are highly confused, often misunderstood and mostly underutilized.

Here’s what they are and how to use them:

1️⃣ Operating cash flow

⚫ Represents the net cash generated by your company's core operations

⚫ Calculated by adjusting Net Income for non-cash items & changes in net working capital assets.

⚫ Used to assess:

>> your company's financial health

>> your company's ability to meet its financial obligations

>> your company’s ability to generate sufficient cash to fund ongoing business operations

>> trends in how the business generates cash

2️⃣ Investing cash flow

⚫ Represents the net cash generated by your company's investments in long-term assets such as property, plant and equipment (PPE).

⚫ Calculated by totaling the net investments in PPE over the period (purchases less sales of PPE)

⚫ Used to assess:

>> your company's investment decisions

>> your company's ability to generate returns from its investments

3️⃣ Financing cash flow

⚫ Represents the cash generated by your company's net debt and/or equity activity.

⚫ Calculated by totaling net debt and equity proceeds over the period.

⚫ Used to assess:

>> your company's financing choices and risk profile

>> your company's ability to raise capital

4️⃣ Free Cash Flow to Firm (FCFF or Unlevered Cash Flow)

⚫ Represents the cash remaining in your business after accounting for cash outflows that support product sales and operations (product costs + operating expenses + working capital) and cash outflows that support the capital asset base (capital expenditures).

⚫ Calculated by adjusting Operating Cash Flow for after tax interest expense and investments in capital assets

⚫ Used to assess:

>> your company's financial strength and ability to generate sufficient cash for growth and reinvestment

>> your company's value based on the discounted cash flow (DCF) valuation.

5️⃣ Free Cash Flow to Equity (FCFE or Levered Cash Flow)

⚫ Represents the cash remaining in your business after accounting for all business expenses, investments in working capital assets, investments in fixed assets, and also all debt obligations (principal & interest).

⚫ Calculated by adjusting Operating Cash Flow for after tax, interest expense, investments in capital assets and net debt payments.

⚫ Cash flow available to be used for investments, dividend payments, returns of capital, additional debt repayments, or acquisitions (includes new debt raises).

⚫ Used to assess:

>> your company's ability to generate cash for distributions to shareholders holders

What do you think?

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