When analyzing a business, most investors first look at the Profit & Loss statement or the Balance Sheet. However, the Cash Flow Statement is often the most revealing document—it shows how money moves in and out of a company.
In this article, we break down the cash flow statement into simple parts so you can understand how companies generate and use cash, using everyday examples and references from well-known firms.
What Is a Cash Flow Statement?
A cash flow statement records the actual movement of cash during a financial year.
Every business performs only three types of financial activities:
Operating Activities
Investing Activities
Financing Activities
The combined cash generated or consumed by these three tells you whether the company is strengthening or weakening financially.
1. Operating Activities: Cash From Core Business
Operating activities show whether a company is generating cash from its primary business operations.
Examples:
For Bajaj Auto, selling motorbikes is the operating activity.
For an IT company, providing software services is the core operation.
A healthy business should ideally generate positive cash flow from operating activities.
If a company is profitable but shows negative operating cash flow, that’s a red flag—something isn’t adding up.
2. Investing Activities: Cash Used for Business Growth
Investing activities show how much money is being invested back into the business.
These may include:
Purchasing new plants or machinery
Building factories
Acquiring equipment
Buying long-term investments
Typically:
Negative investing cash flow → company is actively investing in growth
Positive investing cash flow → company is selling assets or reducing investment
A growing company almost always has negative cash flow from investing, which is considered normal and healthy.
3. Financing Activities: Cash From Borrowing or Repaying Money
Financing activities track how the company raises or repays funds.
These include:
Borrowings from banks
Repayment of loans
Payment of dividends
Issuing shares
Interest payments
This section can be positive or negative depending on the company’s needs:
If a company borrows money → positive financing cash flow
If it repays loans or pays dividends → negative financing cash flow
Financing tells you how the business manages capital and debt.
Putting It All Together: The Net Cash Position
When you combine:
Operating Cash Flow
Investing Cash Flow
Financing Cash Flow
You get the net cash flow for the year.
If the net cash flow is zero, it simply means:
Cash generated = Cash used
There is no net increase or decrease in cash reserves
This is not necessarily bad—it depends on what the company did with its money.
Example Breakdown (Simplified)
Imagine a company shows the following:
Operating Cash Flow: +₹23,400 crore
→ Healthy business operations
Investing Cash Flow: –₹15,200 crore
→ Company is investing heavily in factories/machinery
Financing Cash Flow: –₹8,200 crore
→ Paying loans, interest, or dividends
Now:
23,400 – 15,200 – 8,200 = ₹0 net cash flow
This means:
The company earned money through operations
Used that to invest in growth
And fulfilled financial obligations
The cash didn’t increase, but it was well-utilized.
This is perfectly normal for a stable, expanding company.
Why Cash Flow Matters More Than Profit
A company can show profit but still fail.
Why?
Because profits can be manipulated through accounting adjustments, but cash never lies.
The cash flow statement helps you answer important questions:
✔ Is the business generating real cash?
✔ Is it investing wisely?
✔ Is it borrowing too much?
✔ Can it handle its interest obligations?
If operating cash flow consistently grows year after year, the company is usually on a strong footing.
Red Flags to Watch For
Be cautious if you see:
❌ Negative operating cash flow despite profits
❌ Continuous borrowing to stay afloat
❌ No investment in the business at all
❌ Financing activities dominating the statement
These may indicate poor management or weakening fundamentals.
Conclusion
The cash flow statement is the heart of fundamental analysis.
It shows the truth behind the numbers and gives you a clear picture of how a company manages its money.
Key points to remember:
Positive operating cash is essential
Investing cash usually stays negative in growing firms
Financing cash varies depending on borrowings and repayments
Always analyze all three sections together
Mastering the cash flow statement makes you a far more confident and powerful investor.
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