What is cash flow from investing activities?

The cash flow statement it is one of the most revealing documents of a company’s financial statements, but it is often overlooked. It shows the sources and uses of a company’s cash, both incoming and outgoing. Various sections of a company cash flow the statement contributes to the overall change of the company cash position. Cash flow from investing activities is one of the three main categories, along with operations and financing, in the statement of cash flows.

Understanding cash flow from investing activities

In many cases, a firm may have a negative overall cash flow for a particular quarter. If the company cannot generate positive cash flow from its business operations, a negative overall cash flow is not necessarily a bad thing.

An item in the statement of cash flows belongs to the investing activities section if it is the result of any gains (or losses) from investments in financial markets and operations. BRANCHES. An investing activity also refers to cash spent on investing in capital assets such as tangible assets, which is collectively referred to as capital expenditureor CAPEX.

Below is a more comprehensive list of cash flows that can result from a firm’s investing activities:

Inflows:

• Income from the sale of tangible assets
• Cash proceeds from disposal debt instruments of other entities
• Proceeds from the sale ofequity instruments of other entities

Outputs:

• Payments for the purchase of tangible assets
• Payments for the purchase of debt instruments of other entities
• Payments for the purchase of equity instruments of other entities
• sales/MATURITY of investments
• Buying and selling long term assets and other investments

Companies with excess capital or financial institutions such as banks and insurance companies will report buying and selling activity from their investment PORTFOLIOS in the investing activity side of the statement of cash flows.

Reading a company’s cash flow statement

A simple cash flow (from investing activities) for the Texas Roadhouse restaurant chain (TXRH):

Right off the bat, you can see that the main investment activities for Texas Roadhouse were CAPEX. Texas Roadhouse is growing rapidly and spending heavily on CAPEX to open new restaurant locations in the United States. In it 10 K filing with the SEC, the company details that it is spending money to remodel existing stores and build new ones, as well as to acquire land to build on. Overall, CAPEX is an extremely important cash flow item that investors they will not find in the reported company profits.

Texas Roadhouse also strategically buy franchises and spent $4.3 million in 2012 doing so. Sometimes it can sell restaurant equipment that is obsolete or unused, which then brings in cash instead of being an outflow like other CAPEX. This activity amounted to just over $1 million in 2012.

Analysis of the cash flow statement is extremely valuable because it provides a reconciliation of the beginning and ending cash from the balance sheet. This analysis is difficult for most publicly traded companies because of the thousands of line items that can go into the financial statements. For Texas Roadhouse, its net property and equipment increased by approximately $34.4 million between 2011 and 2012. Of this amount, capital expenditure was with capital letters (not spent) in the balance sheet, net of depreciation. The other costs were expensed and reflected in the profit and loss account. As for the nearly $4.3 million spent to buy the franchised restaurants above, here’s where it was allocated on the balance sheet:

For a public company, it will be almost impossible to use the original balance sheet and statements of cash flows to determine each item down to the specific dollar amount. With his help notes to the financial statements (the above are from Texas Roadhouse notes on acquisitions), an interested party can get a good idea of ​​the major items on the investment side of the cash flow statement and what they mean for a firm’s financial health.

Meaning of cash flow statements

A firm can suffer from unwise spending on acquisitions or CAPEX, either to maintain or grow its operations. A guide to CAPEX is how it relates to depreciation and Amortizationwhich can be found in cash flow from operations on the cash flow statement. This is an annual charge for past expenses that have been capitalized on the balance sheet to grow and maintain the business.

For Texas Roadhouse, it amounted to $46.7 million in 2012. The fact that CAPEX was almost double this amount proves that it is a growth company. However, there was no concern about his financial health as he had minimal long-term debt (other than capital leasing contracts) and generated an impressive $146 million in operating cash flow for the year to easily cover CAPEX and $29.4 million in share buybacks for the year (cash flow from financing activity).

Special considerations

The investment section of the statement of cash flows must be analyzed in conjunction with a firm’s other financial statements. Reviewing CAPEX, procurement and investment activity are some of the most important exercises to see how effectively a company’s management is using it. shareholder capital to carry out its operations.