Cash Flow from Investing Activities
What it is:
How it works (Example):
A statement of cash flows typically breaks out a company's cash sources and uses for the period into three categories: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
Cash flow from investing activities primarily reflect the company's purchases or sales of capital assets (that is, assets that appear on the balance sheet and have a useful life of more than one year). It is important to note that companies have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the cash flow of different companies.
Why it Matters:
Companies and investors always like to see positive cash flow from every aspect of a company's operations. After all, without positive cash flow, a company may have to borrow money to do these things, or in worse cases, it may not stay in business.
However, having negative cash flow for a time is not always a bad thing. If a company is a net spender of cash for a time because it is building a second manufacturing plant, for example, the company's might show negative cash from investing activities. Nonetheless, this could pay off for investors later if the plant generates more cash. On the other hand, if the company has a negative cash flow from investing activities because it is making poor asset-purchase decisions, then the long-term benefit might not be there.
It is important to note that cash flow is not the same as net income, which includes transactions that did not involve actual transfers of money (depreciation is common example of a noncash expense that is included in net income calculations but not in cash flow calculations). Investors often hunt for companies that have high or improving cash flow but low share prices -- the disparity often means the share price will soon increase.