Cash flow from financing activities (CFF) is a crucial part of a company’s cash flow statement, showing the net flows of cash used to fund the company. Financing activities include transactions involving debt, equity, and dividends.
CFF provides deep insights into a company’s financial strength and how well it’s managing its capital structure.
Formula and Calculation for CFF
Investors and analysts use the following formula to determine if a business is on sound financial footing:
CFF = CED - (CD + RP)
where:
- CED: Cash inflows from issuing equity or debt
- CD: Cash paid as dividends
- RP: Repurchase of debt and equity
Steps:
- Add cash inflows from the issuance of debt or equity.
- Add all cash outflows, including stock repurchases, dividend payments, and debt repayment.
- Subtract the outflows from the inflows to compute the cash flow from financing activities.
Example Calculation
Consider a company with the following details:
- Repurchase stock: $1,000,000 (cash outflow)
- Proceeds from long-term debt: $3,000,000 (cash inflow)
- Payments to long-term debt: $500,000 (cash outflow)
- Payments of dividends: $400,000 (cash outflow)
Thus, CFF would be calculated as:
$3,000,000 - ($1,000,000 + $500,000 + $400,000) = $1,100,000
Key Takeaways
- CFF is a section of a company’s cash flow statement showing net flows of cash used to fund the company.
- It includes transactions involving debt, equity, and dividends.
- Debt and equity financing are reflected in this section, influencing capital structure, dividend policies, or debt terms.
Delving into Financial Statements
The cash flow statement is one of the three main financial statements vital to understanding a company’s financial health. The other two are the balance sheet and income statement. The cash flow statement measures the cash generated or used by a company over a period. It has three sections:
- Cash flow from operating (CFO)
- Cash flow from investing (CFI)
- Cash flow from financing activities (CFF)
Investors can gather further insights about CFF from the balance sheet’s equity and long-term debt sections, as well as the footnotes.
Raising Capital From Debt or Equity
CFF indicates how a company raises cash to sustain or grow its operations, whether through debt or equity. Debt involves issuing bonds or loans, which require interest payments. Equity involves issuing stock, which may come with dividend payments representing a cost of equity.
Transactions Leading to Positive CFF
- Issuing equity or stock
- Borrowing debt from a creditor or bank
- Issuing bonds
Transactions Leading to Negative CFF
- Stock repurchases
- Dividends
- Paying down debt
Warnings for Investors
A positive CFF might indicate a company is not generating enough earnings and is turning to new debt or equity. Also, higher interest rates increase debt servicing costs.
Conversely, repurchasing stock or issuing dividends while underperforming could signal the company’s management is focusing on pleasing investors temporarily.
Significant changes in CFF should prompt a detailed analysis of the transactions.
Real-World Example: Walmart
Here’s a snapshot of Walmart’s financing activities for the fiscal year ending January 31, 2022:
| Activity | Amount (in USD millions) |
|---|---|
| Net change in short-term borrowings | 193 |
| Proceeds from issuance of long-term debt | 6,945 |
| Repayments of long-term debt | (13,010) |
| Premiums paid to extinguish debt | (2,317) |
| Dividends paid | (6,152) |
| Purchase of Company stock | (9,787) |
| Dividends paid to noncontrolling interest | (424) |
| Sale of subsidiary stock | 3,239 |
| Other financing activities | (1,515) |
| Net cash used in financing activities | = (22,828) |
Though Walmart had a large net cash outflow, these actions, such as debt repayment and stock repurchasing, might be seen positively by investors and the market.
Related Terms: Cash Flow from Operating Activities, Cash Flow from Investing Activities, Capital Structure, Debt Financing, Equity Financing.
References
- United States Securities and Exchange Commission. “Walmart Form 10-K, FY 2022”, Page 57.
