Cash flow from investing activities (CFI) is a crucial section on the cash flow statement, detailing the cash generated or spent on various investment-related operations within a specified period. This includes purchases of physical assets, investments in securities, or the sale of securities or assets.
Negative cash flow is often viewed as a sign of poor company performance. However, negative cash flow from investing activities might indicate substantial cash being devoted to long-term growth initiatives such as research and development.
Key Takeaways
- Cash flow from investing activities showcases the cash inflow and outflow related to investments.
- Investment activities encompass buying physical assets, acquiring securities, or selling such assets and investments.
- Negative investment cash flow might reflect strategic long-term investments in a company’s future well-being.
Understanding Cash Flow From Investing Activities
Before delving into different types of investment cash flows—either positive or negative—it’s essential to identify where a company’s investment activity lies within its financial statements. These three main financial statements include:
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Balance Sheet: Offers an outline of a company’s assets, liabilities, and owner’s equity as of a specific date.
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Income Statement: Illustrates a company’s revenue and expenses over a specified period.
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Cash Flow Statement: Bridges the gap between the income statement and balance sheet by showing operational, investing, and financing cash flows.
Types of Cash Flow
The cash flow statement encompasses overall cash used in operations, including working capital, financing, and investing. Let’s break this down into three sections:
Cash Flow From Operating Activities
Operating activities cover daily business operations, such as:
- Cash received from sales of goods and services
- Interest payments
- Salary and wages
- Payments to suppliers
- Income tax payments
Cash Flow From Financing Activities
Cash generated or spent on financing activities reflects net cash flows for funding operations, including:
- Dividend payments
- Stock repurchases
- Bond offerings—generating cash
Cash Flow From Investing Activities
Investing activities reveal cash used in acquiring non-current or long-term assets for future benefits, including:
- Capital expenditures (CapEx)
- Purchases or sales of property, plant, and equipment (PPE)
- Investments in or liquidation of securities
Expenditure on capital and tangible assets leads to negative cash flow, though it indicates future growth. Investors and analysts evaluate capital expenditure measures for assessing a company’s valuation. However, high capital expenditures hint towards expansionary efforts.
Examples of Cash Flow From Investing Activities
Examining cash flows from investing activities, we distinguish between negative and positive flows:
- Purchase of fixed assets—cash flow negative
- Investments in stocks or securities—cash flow negative
- Lending money—cash flow negative
- Sale of fixed assets—cash flow positive
- Sale of investment securities—cash flow positive
- Collection of loans and insurance proceeds—cash flow positive
Changes in non-current assets on the balance sheet from one period to another might indicate investing activity captured on the cash flow statement.
Example: Cash Flow From Investing Activities
Consider the following cash flow illustration from Apple Inc., excluding document reaffirmations.
Negative Cash Flows
- Marketable securities purchases: $21.9 billion
- Property, plant, and equipment acquisition: $7.7 billion
- Business acquisitions and non-marketable security payments
Positive Cash Flows
- Marketable securities’ maturity proceeds: $26.7 billion
- Marketable securities’ sales proceeds: $49.5 billion
For the period ending June 29, 2019, Apple’s net cash flows generated from investing activities amounted to $46.6 billion. While significant sums were spent on property, equipment, plant, overall Apple’s investment activities contributed to positive cash flow.
Comprehensive Analysis
Assessing a company’s financial health requires analyzing the cash flow statement alongside the balance sheet and income statement.
Activities Included
Investing cash flows include:
- Capital expenditures
- Lending activities
- Investment securities transactions
- Property, plant, and equipment investments
Calculating Cash Flow From Investing Activities
Using Google’s hypothetical scenario:
- Capital expenditures: $30 billion
- Investment purchases: $5 billion
- Acquisitions: $1 billion
- Positive cash flow from investments sales: $3 billion
Sum: -$33 billion
Importance of Cash Flow From Investing Activities
This flow is vital for gauging long-term strategies and decisions. For instance, investing in fixed assets for business expansion, while initially experiencing negative cash flow, could translate into future revenue generation. Additionally, securities investments can boost profits in the short term.
Related Terms: operating activities, financing activities, capital expenditures, financial statements, non-current assets.
References
- Apple. “Consolidated Financial Statements”, Page 1-3.
- Apple. “Consolidated Financial Statements”, Page 3.
