How To Analyze a Cash Flow Statement

Hello everyone and welcome back to another video in today's video. I want to show you how to properly read a

cash

flow

statement

, as well as some things to keep in mind when reviewing them, but first let me explain what a

cash

flow

is. The balance sheet actually is, which is why a cash flow

statement

is one of the three key financial statements you should consider when thinking about investing in a company. The other two key financial statements are the balance sheet and the income statement, which I've already done. There are also videos on my channel, so I'll leave links in the description to those videos if you haven't seen them yet, but the purpose of the cash flow statement is to show you the cash in and out of the business.

So literally every number on the cash flow statement is meant to show you how much money is coming in or going out of the business, which makes understanding how to

analyze

a cash flow statement absolutely critical when you're looking to invest in a new business. business because the cash flow statement shows you the financial health of the company as well as the liquidity and ability of that company to pay all its debts, so now let's move on to some real world cash flow statements to so that we can all understand how to read them better. as well as identify some things that we might want to keep in mind, so let's start this video in Yahoo Finance once again and all we have to do is go to this search box here at the top and search for the company. that we want to look at so today let's take a look at Delta one more time we'll take you to this page and then all you need to do is go into financials and go to cash flow and now you're looking at deltas cash flow statement So before we start, there are a couple of things I want to point out and the first is that the top number on the cash flow statement is net income and where this net income number comes from is actually from the income statement.

If you go to the income statement and scroll down to net income, this is the number that appears at the top of the cash flow statement. The second thing I want to say is that the cash flow statement is divided into four different segments, the first segment is the cash flow from operating activities, so this is the amount of cash flow that the business generates from of daily operations. The second segment here is the cash flow from investing activities and this is the amount of cash flow that is generated from the investments in the business or the investments that the company owns and then the third segment is the cash flow cash from financial activities and this is the amount of cash flow that the company generates by taking on new debt or raising new debt, as well as by paying dividends and buying back companies' shares. but we'll get into that in a minute and then the fourth and final segment is the net change in cash and it just shows you the amount of cash that the company has as well as the free cash flow of the company, which we'll also get into more forward.

Wait a minute, but those are the four main segments of the cash flow statement and they're all a little bit different, but they're all very important. Another couple of very quick but key things I want to point out is that all the numbers in this cash flow statements are reported in thousands, so we can look at the net income here and it looks like it's four point seven million dollars, but in actually it's four point seven million thousand, which is four point seven billion and also this TTM means twelve months ago, so, right? Now, Delta's trailing twelve month net income is the same as the net income reported in 2019 because its Q4 2019 reports were its most recent reports, so these two numbers will be the same.

Now let's start digging into what these numbers really mean. The net income already reported comes from the net income reported on the income statement, so next is depreciation and amortization, and the reason depreciation and amortization is added back to the cash flow statement is because depreciation is not a cash expense for the company and we only have To think about this, let's say you bought a car for $20,000 and that year your car depreciated by four thousand dollars. This depreciation is not a cash expense to you, it is just a loss in value of the physical asset, so since depreciation is not a cash expense to Delta.

They add the depreciation back to the cash flow statement, so in the case of Delta we can see that they added just under $2.6 billion of depreciation to the cash flow statement and this story is the same with taxes on the deferred income. Deferred income taxes are not a cash expense so they are added back to the cash flow statement so next we have the change in working capital and we can see that Delta reported two hundred and nineteen million dollars in changes in working capital, for those of you who may not know. What working capital is is simply the company's current assets minus the company's current liabilities, so some changes in working capital are reported on the cash flow statement, so when We see positive working capital means that Delta took on new debt or sold a fixed asset to generate more money and the amount of debt or money generated is two hundred and nineteen million dollars in the case of Delta.

Well the next line is accounts receivable so to understand accounts receivable on a cash flow statement we first need to understand what accounts receivable are so here I have the definition of accounts receivable which literally means money that your debtors owe a company, so let's go back to Delta, so accounts receivable is money that is owed to Delta and what I want to point out here before we continue. Next up is that Delta's accounts receivable on Yahoo Finance says there has been no change, but this is actually false. If we go to Delta's 10k and look at their actual cash flow statement, we can see that they had negative 775 million in accounts receivable, so sometimes you will.

I see discrepancies between Yahoo Finance and the actual financial statements reported by the Company, but the conclusion here when you say that the net cash provided by operating activities will always be accurate, but now let's go back to accounts receivable so we can see that Delta had seven hundred negative fifty. Seventy-five million dollars reported on their cash flow statement for accounts receivable, so when you see a negative accounts receivable number like this on a cash flow statement, it simply means that the company's accounts receivable company actually increased because we have to think about this if the Accounts receivable is the amount of money that is owed to a company and that amount that is owed to the company increases year after year, which means that there is less flow of cash towards the company and more money is owed to the company, so this money is owed as debt. it's not cash yet, so an increase in accounts receivable is reported as a decrease in cash flow because it's not money coming in, so what I can do is give you the inverse because that might help us all understand this. . a little further, for example, in 2018 we can see that Delta reported a positive number of accounts receivable, what this means is that Delta's accounts receivable from the previous year actually decreased by this one hundred and eight million dollars, so that since Delta's accounts receivable was being paid faster than it was growing, the difference is reported as cash because the accounts receivable that are paid off are cash coming into the business, so what I'm trying to say here is that when you see positive saveable accounts on the cash flow statement it means that the accounts receivable are actually being paid faster than they are growing and when you see a negative number on the accounts receivable it means that the accounts receivable They are growing faster than they are paying for themselves, but now let's move on to inventory. and we can see that Delta spent one hundred thirty-nine million dollars on inventory, so in the case of Delta, they spent one hundred thirty-nine million dollars on jet fuel to add to their current inventory, so since Delta spent this one hundred thirty-nine million Thirty-nine million dollars is reported as a negative number on the cash flow statement because money is leaving the business and the next line here is other working capital and, honestly, this is more or less the same as the change in working capital that we already discussed.

Previously, they're just a bunch of different numbers that Yahoo Finance just wants to report together, which is why you see this word other working capital because Yahoo Finance just doesn't have enough boxes to report each one individually, but they're all working capital. related articles, so we can see here in the case of Delta that they reported just under 3.5 billion dollars in addition to their working capital and again, if you want to go and take a look at Delta's actual 10k presentation, you can go and see each individual thing here and This is the same thing here with other non-monetary items where you can see a negative spending of 615 million dollars.

Yahoo Finance won't go into the details of this number, but regardless, as I said earlier in the video, of the net cash provided by operating activities. will always be accurate, so while yes, whoever funded it does a poor job of reporting the rest of these numbers, this number here will always be accurate and this is really the most important number that we need to pay attention to so that we can see it. Delta reported net cash provided by operating activities of $8.4 billion, so what this means is that Delta's operations produced positive cash flow of $8.4 billion, which is good, you want your net cash provided by operating activities be a positive number because if your operations are producing negative cash flow it literally means that the company is losing money on its operations or the actual operations of the company are not producing profits, so now let's go to the second segment, which is the cash flow from investing activities and the first line here.

They are investments and property, plant and equipment, so in the case of Delta this could be something like buying a new airplane or buying a new office and we can see that Delta spent four point nine billion dollars on property, plant and equipment. equipment. The next line is acquisitions. this is the amount of money the company spends on acquiring another business and we can see that in the case of Delta they spent 170 million dollars on acquisitions now if Delta's acquisitions were crazy like 20 billion dollars is when it would start to appear a red flag. for me and I would have to do more research on these acquisitions that the company is actually making because if Delta is investing twenty billion dollars in another company and not again in its own business, then maybe that tells me that I should be looking to invest my own money in another company, that's how Benjamin Graham, the author of The Intelligent Investor, sees it, and it makes sense to me too, so that's how I see it too, so keep going Take a look at how much companies are investing to acquiring other companies versus how much they are actually investing in their own businesses.

The next line here is investment purchases and it looks like Delta made no new investment purchases this year, so there's really nothing. To report there and just below we have sales maturities and investments and we can see that Delta generated two hundred and six million dollars in sales and maturities of investments, so let's go to Delta's 2018 cash flow statement and we can see that it bought one hundred and forty and five million dollars in investments, so if Delta purchased one hundred and forty-five million dollars in investments in 2018, then we can see that the sales and maturities of these investments generated them two hundred and six million dollars.

Keep in mind that this is just an example because we can see that Delta has been investing a lot of money in the previous years, so these two hundred and six million dollars in sales and investment maturities are probably not solely due to these one hundred and forty-five . million dollars they invested the previous year. I'm just showing you an example of what this really means and this two hundred and six million dollars could have come from any of these previous investments that Delta has made, but regardless of this, this means that Delta generated this positive cash flow by selling your previous investments and then other investing activities, it's pretty much the same as investment sales and maturities, only Yahoo Finance won't report the details of this, so again, if you want to know the details, go to Delta .

Presentation of 10k and all the details will bethere if you want to break it down and then at the bottom we have the net cash used for investing activities and we can see that in total, Delta spent $4.5 billion on investing activities in 2019, so since most of it of that expenditure was investments in property, plant and equipment, I am NOT concerned about this figure at all because Delta is spending most of this money simply investing back into the company, which is what you want to see, so now let's move on. to cash flows from financing activities, so the main point here is debt repayment and this is self-explanatory: it is just the amount of money the company has paid in debt in the last year, for which in the case of Delta we can see that they paid 3.3 billion dollars in debt and the next line is the buyback of common shares, which is a bit of a controversial topic lately.

I'm not going to go into that in this video, I just want to explain what these numbers mean. Common stock buybacks are when the company literally buys back its own shares, which is why Delta spent just over $2 billion buying back Delta shares in the last year. Common stock buybacks are not a bad thing if the company can afford to do so. And the company is buying back shares at a low price. If the company's cash flow does not support the common stock buyback, that's when it's a sign. red flag for me because it means that the company is not spending its money wisely, but if the company generates a ton of cash flow and they buy back their shares, then I really don't see any problem with the next line being dividends paid and this is the dollar amount of dividends that the company has paid to its shareholders, so in the case of Delta we can see that they spent 980 million dollars on paying dividends to all the shareholders of the company and then on other financial activities is the amount of money the company raised by raising new debt, so we can see here that Delta raised about $1.7 billion in new debt. and then at the bottom here we have the net cash used or provided by financing activities and in the case of Delta we can see that they have a negative $2.8 billion in financing activities and then the final segment here starts with the net change in cash so we can see that Delta added $982 million to its cash pile this year and let me show you how this number is derived so if we increase all we have to do is take the net cash provided by operations so than 8 4 to 5 and then we add or subtract the net cash used for investing activities, so since this number is negative we just have to subtract it, after minus four five six three billion and then we scroll down and do this a increasingly with the net cash used or provided by the financing. activities and this is another negative number, so we just have to subtract again about two point eight eight billion dollars and this leaves us with nine hundred eighty-two million, which is the net change in cash, since the net cash provided by operating activities is greater than the sum of the net cash used for investing activities and the net cash used for financing activities, what is left is a positive net change in the company's cash position, which is really good to see because it's good to invest in companies that are growing their cash position, so here in 2017 we can see that Delta actually had a negative change in its cash position, so I don't rule it out and say, oh, this is something negative, you want to go investigate and see why. there is a negative net cash change for the year because maybe it is justified and my immediate thought is that maybe the company spent more money this year acquiring another business, which resulted in a net cash change for the year, so If we go back to Acquisitions we can see that Delta spent $1.2 billion on an acquisition that year, so what I would do from here is take a look at Delta's 10k presentation and see what this acquisition was and take my own decision if I believe it.

Whether it was justified or not, but most likely it was justified, so I wouldn't worry about this negative net cash change in 2017 because acquiring a business is a way to continue to grow the business you are investing in, as long as company is left with enough cash to continue trading and everything is fine then I wouldn't consider this a red flag or something negative so always dig a little deeper behind the numbers and then the next line down is cash at the beginning of the period. self explanatory that's just the amount of cash that they had at the beginning of the year and then the cash at the end of the period is the cash that they have at the end of the year so self explanatory stuff and then in the bottom line here we have free cash flow and the way you determine free cash flow is by taking your operating cash flow and in your capital expenditures obviously your operating cash flow is the amount of money that the business actually generates from operations, which is also this number right here net cash provided by operations now, if we scroll down this capex, some people refer to this as the X limit, so if you see the limit X is just capital expenditure, what is capital expenditure is simply the investments in real estate plant. and equipment, which costs here four point nine billion dollars and if you scroll down you can see four point nine billion dollars, so when you take the operating cash flow and that capex, that leaves the free cash flow of the company and the Free cash flow is essentially the amount of money the company has to spend freely on whatever management wants, so in the case of Delta we can see that they use the free cash flow to buy back shares of the company and practically pay dividends, so if a company generates negative cash flow and you see them buy back shares and pay dividends, that would be a red flag to me, because why buy back shares or pay dividends if the company in doesn't actually have positive free cash flow?

So one thing that you also want What we can see is that the company's free cash flow increases year over year because that means that the company continually generates more and more free cash to invest back into the business and all that, so We can see Delta's free cash flow up to here in 2016. It was three point eight billion dollars and then it went down to one point two billion, which is kind of a red flag, but since then the free cash flow Free cash flow has increased once again, so I don't like to see cash flow take so much.

There was a massive draw here from 2016 to 2017, but the fact that it is increasing again is good, so now I want to show you what I personally look for and some things that I think are red flags, so from the beginning first things. What you want to see is net income increasing year over year, so based on everything we've already seen, it looks like Delta had a pretty good year in 2016 and then the next year it looks like it was tougher and then has increased steadily. and now Delta is growing its net income once again so that's good to see and if you wanted to invest in 10 Delta you would just take a look at the 2017 10k filing to try to figure out why its net income fell.

In this year, if we scroll down, you will also want the net cash provided by operating activities to increase because this is the amount of money that the operations of the business actually generate and this is a good thing to see because in 2016 I can see that they generated 7.2 billion, 2017 was 5.1 billion, 2018 was 7 billion and then 2019 was the best year so far with eight point four billion, so it's also very good to see the cash flow from activities investment, as I already said I would. just pay attention to the acquisitions versus the amount of money that companies are investing back into their own business and if the acquisitions are greater than the amount of money they are investing back into their own business, that's when I would start asking questions and dig a little deeper and then in the financing area you would simply be paying attention to how much new debt the company is taking on if this number is ridiculous and you believe that the company cannot pay this debt in the future or is seriously going to . damage the future cash flow of the company, that's when my red flags would start to appear and I would wonder why is this company generating so much new debt and what is the purpose of it, so I really just want to show you a flow of box. statement that I think is pretty bad and this is from uber.

Now I'm not going to say if Uber is a good or bad investment. I just want to show you what a bad cash flow statement really looks like, so from the beginning You can see that in 2016 Uber's net income was negative 370 million dollars, 2017 was negative 4 billion, 2018 was positive almost a thousand million and then in 2019 they skyrocketed to negative eight point five billion dollars, so Uber's net income is a trend that continues to decline. and getting worse and worse, another thing here at Uber is the cash flow statement they have is stock based compensation, so let's go to investopedia and read what stock based compensation is.

Investopedia says that stock compensation is a way that corporations use stock options to reward employees, so this is the dollar amount of stock options that have been granted to employees such as the CEO of management and basically everyone and in the case of Uber this is almost four point six billion dollars and this is a major red flag for me, it's not a red flag in itself. companies reward management or employees with stock options, but when almost four point six billion dollars are awarded and the company's net income is negative eight point five billion, that is very, very incomplete because the company is not actually making a profit, so As a shareholder, you are a part owner of this business, so if you had excess stock, I would wonder why you pay the employees, the CEO, the management, everyone these bonuses when the company is not yet producing a real profit, it only means that this is based on shares. the compensation literally comes out of the investors' pockets and not from the actual operations of the company, so as an investor I'm not very comfortable with that, but anyway let's get down to the net cash provided by operating activities and we can see that this number is negative, which means that Uber is losing four point three billion dollars on its operations every year right now and I'm going to take this one step further because if Uber is not generating positive cash flow of the operations of the business, then you need to Go and look at where the money for this company is actually coming from, for example, how does this company stay in business if it is losing four point three billion dollars every year on its operations?

That's when you need to scroll down to cash flow. provided from financing activities because financing activities are how the company raises money so we can see here in excessive cases that they have common shares issued and they generated eight point four billion dollars with the issuance of shares ordinary. Now this issuance of common stock is due to Buber doing an initial public offering. or an initial public offering, which means that uber went public and ordinary investors like me can go and buy uber shares, so uber generated just under eight point five billion dollars by issuing shares so that the public invested in them, they essentially sold eight point five billion dollars. value of shares to the public that we can now buy and sell in the stock market, but when you see that the net cash provided by financing activities is such a positive number versus the net cash provided by operating activities which is such a negative number , this is what Benjamin Graham calls an OPM company and OPM means other people's money, this means that Uber right now is literally draining other people's money, so Uber is classified as an OPM company, so as investor, this is a red flag because it means that the company's operations are not yet sustaining the business, so until additional operations can provide positive cash flow, they will rely on external financing and outside investors to continue growing the business, so Uber's cash flow statement is just a very good example to show you the multiple red flags. that stand out when I review thecash flow statements, so I really hope that wasn't too much of a ramble.

I just wanted to dig deeper because, in my opinion, I think the cash flow statement is the most important financial statement. statement to pay attention to, so I really hope I provided enough explanation and that the two examples I showed made enough sense before I finished the video. I just want to let you know that I am working on creating a complete investing course that will show you everything from the basics of investing to how to confidently evaluate and find your own businesses to invest in. I've received a lot of requests to build something like this and my goal is to have it ready by the end of May.

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