Cash Flow Statement Breakdown

How to Read a Cash Flow Statement Like a Pro Many professionals stick to the P&L and balance sheet. But the cash flow statement often hides the truth about a company’s financial health. Here’s how to break it down step by step: 1. Start with Operating Cash Flow - This shows how much cash the core business is generating. - Healthy companies should consistently have positive OCF. - If profits are rising but OCF is falling, dig deepe, it may be earnings manipulation. 2. Move to Investing Cash Flow - Look at where the company is investing its money. - Negative ICF is not always bad; it often means the company is investing in growth (like new plants, tech, or acquisitions). - But frequent asset sales boosting ICF can signal trouble. 3. Check Financing Cash Flow - Tells you how the company raises and returns capital. - Continuous inflows from debt/equity issuance may suggest dependence on external funding. - Outflows in the form of dividends or buybacks show shareholder returns. 4. Focus on Free Cash Flow (FCF) - The cash left after operating and investing activities. - Positive and growing FCF indicates sustainability and long-term strength. Bottom line: Accounting profits can be dressed up, but cash rarely lies. Master the cash flow statement, and you’ll start seeing companies in a completely different light.

The cash flow picture for US refiners has changed radically. Cash generation is way up, but so are flows out of the business. The chart below is a comprehensive cash flow picture for 7 independent publicly traded US refiners: • Delek • HF Sinclair • Marathon Petroleum Corporation • Par Pacific Holdings, Inc. • PBF Energy • Phillips 66 • Valero Let’s do a quick cash flow 101 before we proceed. The cash flow statement is broken up into three segments: • Cash from operating activities – this is the cash generated from running the ongoing business, e.g. buying crude oil and creating and selling finished products • Cash from investing activities – this is where we see capital expenditures and acquisitions, i.e. investments back into the business to allow future performance • Cash from financing activities – this is the cash raised or spent on issuing new or retiring existing debt, or the cash raised or spent on issuing new or buying back existing shares, or the cash spent on shareholder dividends These three cash flow segments are the three lines in the chart, in billions of US dollars mapping to the left axis. Positive cash flow numbers mean cash coming into the business. Negative numbers mean cash leaving the business. Finally, the gray bars are aggregate refinery throughput, in millions of barrels per day (bpd) mapping to the right axis. I included these numbers just to show that activity levels aren’t shrinking. For these seven refiners on the whole, throughput is where it was going into the pandemic. There are three important elements of this picture: ➊ Cash from operating activities is way above pre-pandemic levels. While it’s coming down, these refiners are still generating historically healthy levels of cash. ➋ Capital investments continue to fall. Going into the pandemic, this cohort was investing around $20B annually into its collective business. That number now is down below $10B. ➌ Cash transfers to creditors and shareholders are way up. We now have around $35B leaving these businesses each year in this way, compared to around $10B annually going into the pandemic. Refiners are trying to thread a needle here. Invest just enough to keep the lights on, knowing the world’s demand for liquid fuels won’t come anywhere close to evaporating overnight. But at the same time, hand as much cash as possible for as long as possible over to shareholders, giving them an incentive to buy and hold your stock. No management team of a multibillion dollar publicly traded company has it easy. But the management teams for these refiners? There aren’t too many groups that have a tougher nut to crack. 

𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐒𝐭𝐚𝐭𝐞𝐦𝐞𝐧𝐭𝐬 𝐤𝐞𝐞𝐩 𝐬𝐞𝐜𝐫𝐞𝐭𝐬! .... we need to learn to uncover them * Long post alert! Read on to understand CF statements and an example of how they inform quality of reported earnings * While P&L stmt tells you what has been reported, CF tells you what has actually happened. e.g., a business could be reporting rising profits overtime, but the CF stmt could have falling operating cash flows — which could likely mean that money is getting stuck in working capital. But, how do we conclude that there are working capital issues? First, let’s understand a very simple CF Stmt: ———————————————————————— Section 1: Cash Flow from Operations activities (CFO) = + net profit - increase in receivables (e.g., sales booked, but not paid yet by customers) - increase in inventory + increase in payables (e.g., withheld payments to suppliers) + depreciation Note: receivables + inventory - payables = simplified representation of working capital. ( Read my post on "What is working capital?": https://lnkd.in/eZ6-ht6Y ) Section 2: Cash Flow from Investing activities (CFI) = - Capital expenses Section 3: Cash Flow from Financing activities (CFF) = + net debt issuance + share issuance - dividends paid Net change in Cash = CFO + CFI + CFF How to read these 3 sections together? A firm raises debt or issues shares (CFF) to fund capital expenses (CFI), which in turn will help the firm expand (i.e., set up plants, buy equipment etc.) and then generate sales and hence profits (CFO). Over a period of time, the firm should ideally rely less on CFF and generate sufficient profits (CFO) to fund CFI needed for growth. but, 𝘱𝘳𝘰𝘧𝘪𝘵𝘴 𝘮𝘢𝘺 𝘯𝘰𝘵 𝘢𝘭𝘸𝘢𝘺𝘴 𝘵𝘳𝘢𝘯𝘴𝘭𝘢𝘵𝘦 𝘪𝘯𝘵𝘰 𝘰𝘱𝘦𝘳𝘢𝘵𝘪𝘯𝘨 𝘤𝘢𝘴𝘩 𝘰𝘳 𝘊𝘍𝘖 𝘨𝘦𝘯𝘦𝘳𝘢𝘵𝘪𝘰𝘯 ————————————————————————— Now, look at the enclosed example. See how despite reported increasing sales and profits, a big portion of money from those sales has not come in the business yet -- i.e., high customer receivables (sales booked, but non paid by customers yet) are leading to a low operating cash or CFO. Similarly, rising inventory or declining payables could be another reason for low levels of operating cash. When a business is 𝒄𝒐𝒏𝒔𝒊𝒔𝒕𝒆𝒏𝒕𝒍𝒚 unable to convert reported profits into operating cash then it isn't healthy -- the business would be forced to raise debt or issue more shares (CFF) to meet its high working capital requirement. ------------ My playlist on understanding and interpreting Financial Statements is present in the comments. #investandrise #valuation #financialstatements #financialstatementanalysis #equityresearch #cashflowstatement #cashflow

If your P&L says you're making money, but you don't know where your cash is going every month, start here ⤵ I've spoken with multiple business owners who were profitable on paper, but they couldn't figure out where their cash was going every month. 💡 The starting point is understanding your Statement of Cash Flows 💡 The Statement of Cash Flows is a financial statement that very few small business owners use, but it should be used regularly. Why you need it ⤵ The Statement of Cash Flows puts the cash inflows and outflows of your business into three main categories: ➡ Cash Flows from Operations - This section includes the cash generated by or used in your core business operations. - Watch this section carefully to make sure that your core business operations are generating positive cash flows.  - If your core operations are not generating positive cash flows then you could have problems with your pricing, inefficient operations, or collecting payments from customers, among other things. ➡ Cash Flows from Investing - This section includes cash spent on or generated from investments like the purchase or sale of real estate, securities, or capital assets like equipment and vehicles. - The cash flows from these activities don’t show up on your P&L, but they can have a significant impact on cash flow. ➡ Cash Flows from Financing - This section includes cash inflows and outflows related to funding your business, such as proceeds from new loans, repayments of existing loans, capital raised, or distributions paid to owners or investors. - The cash flows from these activities also don’t show up on your Income Statement, but they can have a significant impact on cash. Once you understand where your cash is going (thanks to the Statement of Cash Flows), and you identify any potential problem areas, then you have a better idea of where to start making changes to improve cash flows. ⚠ Disclaimer: The Statement of Cash Flows is only as reliable as the data flowing into it. If your financial statements aren't accurate, or transactions aren't coded correctly, then it won't help you and could actually be misleading. Make sure that you're confident in the accuracy of your bookkeeping and financial statements. ____________________________________________________________________________ I help #purposedriven entrepreneurs save time and gain financial clarity, so they can make more confident decisions for their companies. Virtus Accounting Solutions, LLC #entrepreneurship #SmallBusinessSuccess #financialclarity #faithinbusiness #faithbasedbusiness #purposedriven #CFOServices #virtualcfo #cashflows

Most business owners make the same mistake: They just focus on PROFIT. But profit doesn't tell you the whole story. It doesn’t tell you how much CASH actually came into the business. This is a HUGE problem. Why? Cash flow mismanagement is the #1 reason why businesses fail. If you don’t properly track your cash, you risk your business going bankrupt. Here’s how to read your cash flow statement (we’ll use TESLA as an example): In 2024, TESLA’s net income was $4.8 Billion. Does that mean they got an extra $4.8 Billion in cash? No. In fact, they only kept $1.8 Billion. How did that happen? Let’s take a look at their CASH FLOW statement… The cash flow statement shows you how much cash your business receives and spends. It has 3 sections: 1. Cash flow from Operating Activities 2. Cash flow from Investing Activities 3. Cash flow from Financing Activities Let’s go through each of them… 𝟭/ 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 𝗳𝗿𝗼𝗺 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗔𝗰𝘁𝗶𝘃𝗶𝘁𝗶𝗲𝘀. It gives you insight into: • Total cash generated • Efficiency of cash management • How profit was converted into cash TESLA collected $10.1 Billion from operating activities. 𝟮/ 𝗖𝗮𝘀𝗵 𝗳𝗹𝗼𝘄 𝗳𝗿𝗼𝗺 𝗜𝗻𝘃𝗲𝘀𝘁𝗶𝗻𝗴 𝗔𝗰𝘁𝗶𝘃𝗶𝘁𝗶𝗲𝘀. It gives you insight into: • Assets the company bought • Mergers and acquisitions • Investments made TESLA spent $11.1 Billion on: • Acquisitions • Property and equipment • Marketable securities (bonds and stocks) 𝟯/ 𝗖𝗮𝘀𝗵 𝗳𝗹𝗼𝘄 𝗳𝗿𝗼𝗺 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗻𝗴 𝗔𝗰𝘁𝗶𝘃𝗶𝘁𝗶𝗲𝘀. It gives you insight into: • Capital raised • Loans and Financing • Repayment of debt TESLA collected $2.8 Billion from financing activities. To recap: • Cash Flow from Operating Activities: $10.1 Billion • Cash Flow from Investing Activities: ($11.1 Billion) • Cash Flow from Financing Activities: $2.8 Billion The result = $1.8 Billion Profit is a key accounting measure. But if you truly want to grow your business, you need to understand your cash flow. I hope this post was helpful. Follow Connor Abene for more!