Thread by @IAmOanaLabes

The Income Statement & The Balance Sheet are the most popular financial statements.

But few appreciate that the Cash Flow Statement is where the true power is.

Because even though a company might be profitable on the P&L.

It may still face bankruptcy without sufficient cash to:

>> cover operating costs

>> invest in growth

>> service debt

Here are 7 Essential Cash Flow Insights you get from a company’s Cash Flow Statement:

1️⃣ Solvency:

- Whether the company generates sufficient operating cash flows to comfortably service debt obligations.

- Whether their use of operating cash flow for debt payments aligns with industry standards, demonstrating strong solvency and an acceptable risk profile.

2️⃣ Liquidity:

- Whether the company’s operating cash flow reliably covers current liabilities, indicating a strong ability to meet short-term obligations.
- Whether the management of operating cash flow maintains the company’s financial stability and minimizes its liquidity risk.

3️⃣ Free Cash Flow:

- Whether the company's free cash flow has shown positive growth over time, reflecting a robust and flexible business model.

- Whether the company consistently generates positive free cash flow, demonstrating its capacity to self-fund growth, pay down debt, and return money to shareholders.

4️⃣ Financing Activities:

- Whether the company strategically shifts its financing activities towards debt or equity as conditions require, demonstrating a flexible and savvy financial strategy.

- Whether the company demonstrates strong performance and confidence in its future prospects by consistently returning capital to shareholders through dividends or share buybacks.

5️⃣ Investment Health:

- Whether the company is proactively investing in its future growth by increasing capital expenditure over time.
- Whether the company skillfully aligns its capital expenditure with operational cash flows, ensuring financial health and a sound investment strategy.

6️⃣ Trends and Volatility:

- Whether the company's capital expenditure has been progressively increasing over the years, indicating a solid investment in growth.

- Whether the company's revenue and earnings display a consistent pattern, underscoring the predictability of its future performance.

7️⃣ Quality of Earnings:

- Whether the company primarily relies on genuine business activities, to achieve its reported profits vs relying on non-cash or non-recurring items

- Whether the company optimizes working capital items like accounts receivable, inventory, and accounts payable, maintaining a stable cash flow from operations and high quality of earnings.

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