How To Analyze a Cash Flow Statement

hello everyone and welcome back to another video in today's video I want to show you guys how to properly read through a cash flow statement as well as some things to look out for when we are looking through them but first let me explain what a cash flow statement actually is so a cash flow statement is one of the three key financial statements that you should look at when you're looking at investing into a company the other two key financial statements are the balance sheet and the income statement which I have already done videos on on my channel as well so I'll leave links in the description to those videos if you guys haven't seen them yet but the purpose of the cash flow statement is meant to show you the inflow and outflow of cash in the business so quite literally every number on the cash flow statement is meant to show you money coming in or out of the company this makes understanding how to analyze a cash flow statement absolutely critical when you're looking at investing into a new business because the cash flow statement shows you the financial health of the business as well as the liquidity and how able that business is to pay off all of their debts so now let's hop into some real-world cash flow statements so that we can all understand how to read them better as well as identify some things that we might want to look out for okay so let's start this video off on Yahoo Finance once again and all we need to do is go up to this search box up here at the top and to search for the company that we want to take a look into so today let's look into Delta once again so we will bring you to this page and then all you need to do is hit financials and go to cash flow and now you are looking at deltas cash flow statement so before we get started there's a couple of things that I want to point out and the first thing is that the top number on the cash flow statement is the 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 the net income this is the number that appears on the top of the cash flow statement the second thing that I want to say is that the cash flow statement is broken in to 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 day-to-day operations the second segment here is cash flow from investing activities and this is the amount of cash flow that is generated from investments back into the business or investments that the business holds and then the third segment is cash flow from financing activities and this is the amount of cash flow the business generates from taking on new debt or raising new debt as well as paying dividends and repurchasing the companies on stock but we will get into that in a minute and then the fourth and final segment is the net change in cash and just showing you the amount of cash that the business has as well as the company's free cash flow which we will also be getting into in a minute but those are the four main segments of the cash flow statement and they all are a little bit different but they are all very important another couple really quick but key things that I want to point out is that all of the numbers in this cash flow statement are reported in thousands so we may see the net income here and it looks like it's four point seven million dollars but this is actually four point seven million thousand which is four point seven billion and also this TTM stands for trailing twelve months so right now Delta's trailing twelve months net income is the same as their 2019 reported net income because their fourth quarter 2019 reporting's was their most recent reporting's so these two numbers are going to be the same now let's start digging into what these numbers actually mean so as I already stated net income comes from the net income reported on the income statement so next is depreciation and amortization and the reason that you add depreciation and amortization back onto the cash flow statement is because depreciation is not a cash expense for the company and we just have to think about this so say you bought a car for $20,000 and in that year your car depreciated by four thousand dollars this depreciation is not a cash expense to you it's just a loss in physical asset value so since depreciation is not a cash expense for Delta they add back in the depreciation to the cash flow statement so in Delta's case we can see that they added in just under 2.6 billion dollars of depreciation back onto the cash flow statement and this story is the same with deferred income taxes deferred income taxes are not a cash expense so they are added back on to the cash flow statement so next down we have change in working capital and we can see that Delta reported two hundred and nineteen million dollars in change in working capital so for those of you who might not know what working capital is working capital is simply just 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 a positive and working capital it means that Delta either 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 Delta's case okay the next line down is accounts receivable so to understand accounts receivable on a cash flow statement we first need to understand what accounts receivable are so right here I have the definition accounts receivable quite literally means money owed to a company by its debtors 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 move on is that Delta's accounts receivable on Yahoo Finance says that 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 receivables so sometimes you will see discrepancies between Yahoo Finance and the Company's actual reported financial statements but the bottom line here when it says net cash provided by operating activities is always going to be accurate but now getting back to accounts receivable so we can see that Delta had negative seven hundred and seventy five million dollars reported on their cash flow statement for accounts receivable so when you see a negative accounts receivables number like this on a cash flow statement it just means that the accounts receivable for the company actually increased because we have to think about this if the accounts receivable is the amount of money owed to a business and that amount owed to the business increases year over year it means that there is less cash flowing into the business and more money being owed to the business so since this money is being owed as debt it is not yet cash so that is why an increase in accounts receivable is reported as a decrease in cash flow because this is not money coming in so what I can do is I can give you guys the inverse because that might help us all understand this a little bit more so for example in 2018 we can see that Delta reported a positive accounts receivable number so what this means is that Delta's accounts receivable from the previous year actually went down by this one hundred and eight million dollars so since Delta's accounts receivable was being paid off faster than it was growing the difference is reported as cash because the accounts receivable being paid off is cash coming in to the business so what I'm trying to say here is that when you see a positive accounts savable on the cash flow statement it means that the accounts receivable are actually being paid off faster than they are growing and when you see a negative number on the accounts receivable it means that the accounts receivable is growing faster than they are being paid off but now let's move on to inventory and we can see that Delta spent one hundred and thirty nine million dollars on inventory so when Delta's case what this is is they spent one hundred and thirty nine million dollars on jet fuel to add to their current inventory so since Delta's spent this one hundred and thirty nine million dollars it is reported as a negative number on the cash flow statement because money is flowing out of the business and the next line here is other working capital and honestly this is kind of the same as change in working capital that we already discussed earlier on it's just a bunch of different numbers that Yahoo Finance just wants to report altogether so that's why you're seeing this word other working capital because Yahoo Finance just doesn't have enough boxes to report each one individually but they all are working capital related items so we can see here in Delta's case they reported just under 3.5 billion dollars in additions to their working capital and again if you guys want to go and take a look at Delta's actual 10k filing you can go and see each individual thing here and this is the same thing here with other non-cash items where you can see a negative 615 million dollar expense yahoo finance will not go into the specifics of this number but regardless as I said earlier on in the video the net cash provided by operating activities will always be accurate so even though yeah who financed kind of does a bad job reporting the rest of these numbers this number right here will always be accurate and this really is the most important number that we need to pay attention to so we can see that Delta reported net cash provided by operating activities of 8.4 billion dollars 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 to be a positive number because if your operations are producing a negative cash flow it quite literally means that the company is losing money on their operations or the actual operations of the company is not producing a profit so now let's scroll down to the second segment which is cash flow from investing activities and the first line here is investments and property plant and equipment so in Delta's case this might 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 the next line down is the acquisitions so this is the amount of money that the company spends on acquiring another business and we can see that in Delta's case they spent 170 million dollars in acquisitions now if Delta's acquisitions were something crazy like 20 billion dollars that is when a red flag would start to pop up for me and I would have to go and do more digging into these acquisitions that the company is actually making because if Delta is investing twenty billion dollars into another company and not back into their own business then maybe it tells me that I should be looking at investing my own money into another company as well that's the way Benjamin Graham who is the author of the intelligent investor looks at it and it kind of makes sense to me as well so that's kind of the way I look at it too so just keep an eye on how much companies are investing into acquiring other companies versus how much they are actually investing back into their own business the next line down here is purchases of investments and it looks like Delta made no new purchases of investments this year so there's nothing really to report there and right under that we have sales of maturities and investment and we can see that Delta generated two hundred and six million dollars in sales and maturities of investments so let's just go over to Delta's 2018 cash flow statement and we can see that they purchased one hundred and forty five million dollars in investments so if Delta purchased one hundred and forty five million dollars of investments in 2018 then we can see that the sales and maturities of these investments yielded them two hundred and six million dollars now please 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 this two hundred and six million dollars in sales and maturities of investments is most likely not solely due to this one hundred and forty five million dollars that they invested the previous year I'm just showing you guys an example of what this actually means and this two hundred and six million dollars could have come from any one of these previous investments that Delta has made but regardless this means I Delta did generate this positive cash flow from selling off their previous investments and then other investing activities is kind of the same thing as sales and maturities of investments it's just Yahoo Finance will not report the specifics of this so again if you want the specifics go to Delta's 10k filing and all of the details will be in there if you want to break that down and then at the bottom here we have net cash used for invest activities and we can see that in total Delta spent 4.5 billion dollars on investment activities in 2019 so since the majority of that spending was investments back into property plant and equipment I am NOT concerned at all with this figure because Delta is spending the majority of this money on just investing back into the company which is what you want to see so now let's move down to cash flows from financing activities so the top line here is debt repayment and this one is pretty self-explanatory this is just the amount of money that the company has paid back in debt in the last year so in Delta's case we can see that they paid back 3.3 billion dollars in debt and the next line down is common stock repurchased which is kind of a controversial subject as of late I'm not going to get into that in this video I just want to explain what these numbers mean though so common stock repurchasing is when the company literally buys back its own shares so Delta spent just over two billion dollars repurchasing Delta stock in the last year common stock repurchases are not a bad thing if the company can afford to do it and the company is buying back shares on the cheap if the company's cash flow does not support common stock repurchasing that is when it is a red flag for me because it means that the company is not spending their money wisely but if the company generates a ton of cash flow and their repurchasing their stock then I don't really see a problem with that the next line down is dividends paid and this is the dollar amount of dividends that the company has paid to its shareholders so in Delta's case we can see that they spent 980 million dollars on paying dividends to all of the shareholders of the company and then other financing activities is the amount of money the company raised through getting a new debt so we can see here that Delta raised about 1.7 billion dollars in new debt and then at the bottom here we have the net cash used or provided by financing activities and in Delta's case we can see that they have negative 2.8 billion dollars in financing activities and then the final segment here starts with net change in cash so we can see that Delta added 982 million dollars to their cash pile this year and let me show you guys how this number is derived so if we go up all we need to do is take the net cash provided by operations so 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 so we after minus four five six three billion and then we scroll down and we do this once more with the net cash used or provided by financing activities and this is another negative numbers so we just have to minus again about two point eight eight billion dollars and this leaves us with nine hundred and eighty-two million which is the net change in cash so since the net cash provided by operating activities is higher than the sum of the net cash used for investing activities and the net cash used for financing activities you are left with a net positive change in the cash position of the company which is actually good to see because it's good to be investing in companies that are increasing their cash position so over here in 2017 we can see that Delta actually had a negative change in their cash position so I don't just write this off and say oh this is a negative thing you want to go and investigate and see why there is a negative net change in cash for the year because maybe it is justified and my immediate thinking is maybe the company's spent more money this year acquiring another business which resulted in a net change of cash for the year so if we scroll back up to the acquisitions we can see that Delta did spend 1.2 billion dollars on an acquisition in that year so what I would do from here is going to take a look into Delta's 10k filing and see what this acquisition was and make my own decision if I think it was warranted or not but it most likely was warranted so I would not be concerned of this negative net change in cash in 2017 because acquiring a business is one way to continue growing the business you are investing into so as long as the company is left with enough cash to continue operating and everything is all good then I would not consider this a red flag or a negative thing so just always do a little bit more digging behind the numbers and then the next line down is cash at the beginning of the period that's pretty self-explanatory that's just the amount of cash 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 pretty too self-explanatory things and then at the very bottom here we have free cash flow and how free cash flow is determined is by taking your operating cash flow and - in your capital expenditures so 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 back down this capital expenditure some people refer to this as cap X so if you see cap X it is just capital expenditure what capital expenditure is is simply just the investments back into property plant and equipment which is here four point nine billion dollars and if you scroll down you can see it four point nine billion dollars so when you take the operating cash flow and you - that capital expenditure you are left with the company's free cash flow and the company's free cash flow is essentially the amount of money that the company has to freely spend on whatever the management wants so in Delta's case we can see that they use the free cash flow to repurchase company stock and to pretty much pay dividends so if a company is generating a negative cash flow and you see them repurchasing stock and paying dividends that would be a red flag for me because why are you repurchasing stock or paying dividends if you the company does not actually have a positive free cash flow so one thing you also want to see is the company's free cash flow increasing year over year because that means that the company is continually generating more and more free cash to invest back into the business and whatnot so we can see that Delta's free cash flow all the way over here in 2016 was three point eight billion dollars and then it went down to one point two billion so that is kind of a red flag but ever since then the free cash flow has been increasing once again so I don't like to see the cash flow take such a massive draw up here from 2016 to 2017 but the fact that it is increasing again is good okay so now I want to show you guys what I personally look for and some things that I think are red flags so right off the bat the first thing that you want to see is the 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 rougher and then it's been steadily increasing and now Delta is increasing their net income once again so this is a good thing to see and if I were looking to invest in 10 Delta I would just take a look at the 2017 10k filing to try and figure out why their net income did drop in this year if we scroll down you also want the net cash provided by operating activities to be increasing as well because this is the amount of money that the operations of the business actually generates and this is actually a good thing to see because in 2016 we can see that they generated 7.2 billion 2017 was 5.1 billion 2018 was 7 billion and then 2019 was the best year yet with eight point four billion so this is also a very good thing to see any cash flow from investing activities as I already said I would just pay attention to the acquisitions versus the amount of money the companies and besting back into their own business and if the acquisitions is higher than the amount of money they're investing back into the own business that's when I would start asking questions and digging a little bit more deep and then in the financing area I would just be paying attention to how much new debt the company is taking on if this number is ridiculous and you think the company cannot pay off this debt in the future or it is going to seriously harm the future cash flow of the company that is when my red flags would start popping off and I be like why is this company raising so much new debt and what is the purpose of it so I actually just want to show you guys a cash flow statement that I think is pretty bad and this is from uber now I'm not gonna say if uber is a good investment or a bad investment I just want to show you guys what a bad cashflow statement actually looks like so right off the bat we can see that in 2016 Uber's net income was negative 370 million dollars 2017 was negative 4 billion 2018 was positive almost a billion and then in 2019 it skyrocketed all the way to negative eight point five billion dollars so ubers net income is a trend that continues decreasing and getting worse and worse another thing here on uber is cash flow statement that they have is stock based compensation so let's just go to investopedia and read what stock based compensation is investopedia says stock compensation is a way corporations use stock options to reward employees so this is the dollar amount of stock options that have been awarded to employees such as the management CEO and basically everyone and in ubers case this is almost four point six billion dollars and this is a major major red flag for me it's not a red flag by itself for companies to reward management or employees with stock options but when you're awarding almost four point six billion dollars and the company's net income is negative eight point five billion that is a very very sketchy because the company is not actually generating a profit so as a shareholder you are a part owner of this business so if I owned overstock I would be thinking why am i paying the employees the CEO the management all of these bonuses when the company is not yet producing an actual profit it just means that this stock based compensation is quite literally coming from the pockets of the investors and not the actual operations of the business so as an investor I'm not really comfortable with that but anyways let's go down to 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 their operations every year right now and I'm gonna take this a step further because if uber is not generating a positive cash flow from the operations of the business then you need to go and look at where the money for this company is actually coming from like how is this company remaining in business if they're losing four point three billion dollars every year on their operations so this is when you have to scroll down to the cash flow provided from financing activities because financing activities is the company's way of raising money so we can see here in overs case they have common stock issued and they generated eight point four billion dollars from issuing common stock now this common stock issuance is because Buber did an IPO or an initial public offering which means that uber went public and common investors such as myself can go and buy uber stock so uber generated just under eight point five billion dollars from issuing shares to the public to invest into they essentially sold eight point five billion dollars worth of shares to the public which we can now buy and sell on the stock market but when you see the net cash provided by financing activities is such a positive number versus the net cash provided by operating activities being such a negative number this is what Benjamin Graham calls an OPM company and OPM stands for other people's money this means that uber right now is literally running off other people's money so uber is classified as an OPM company so as an investor this is a red flag because it means that the company's operations are not yet sustaining the business so until overs operations can provide positive cash flow they are going to be relying on outside funding and outside investors to continue growing the business so ubers cash flow statement is just a very good example to show you guys of multiple red flags that do stand out to me when I'm looking through cash flow statements all right so I really hope that wasn't too much rambling I just really wanted to dig in because in my opinion I think the cash flow statement is the most important financial statement to pay attention to so I really hope that I provided enough explanation and that the two examples that I showed made enough sense before I wrap up the video I just want to let you guys know that I am working on building a full investment course that will show you everything from the basics of investing - how to confidently evaluate and find your own businesses to invest in - I have received a ton of requests to build something like this and I am aiming to have it done for sometime around the end of May so if you guys want to stick around and be here for when the course is available then make sure to hit that subscribe button so you can stay up to date with all the future notifications regarding the course and if you guys did enjoy this video or you found it helpful then please remember to just leave a like on it leaving a like really helps up my channel and I really really appreciate it and with all that being said thank you guys so much for watching and I really hope to see you again in the next video

Channel: Daniel Pronk

Views: 315,228

Keywords: daniel, investing, stock market, learn, how to, calgary, buy, sell, Daniel Pronk, Learn To Invest, Investing Basics, Beginner, Investing for beginners, Cash Flow, Understand, Cash, Flow, Understand Cash Flow, Analyze Cash Flow, How To Cash Flow, Cash Flow Beginners, Balance Sheet, Balance Sheet Beginner, Read Cash Flow, Cash Flow Statement, Income Statement, Income Statement For Beginners, Income Analyze, Analyze Income Statement, Analyze Balance Sheet, Cash Flow Daniel Pronk

Id: wlI_jV30lTM

Length: 22min 45sec (1365 seconds)

Published: Mon Apr 20 2020