Reading Financial Reports For Dummies
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The investment activities section of the statement of cash flows on the financial reports, which looks at the purchase or sale of major new assets, is usually a drainer of cash. Consider what this section typically lists:

  • Purchases of new buildings, land, and major equipment

  • Mergers or acquisitions

  • Major improvements to existing buildings

  • Major upgrades to existing factories and equipment

  • Purchases of new marketable securities, such as bonds or stock

The sale of buildings, land, major equipment, and marketable securities also appears in the investment activities section. When any of these major assets are sold, they're shown as cash generators rather than as cash drainers.

The primary reason to check out the investments section is to see how the company is managing its capital expenditures and how much cash it's using for these expenditures. If the company shows large investments in this area, be sure to look for explanations in the management's discussion and analysis and the notes to the financial statements to get more details about the reasons for the expenditures.

If you believe that the firm is making the right choices to grow the business and improve profits, investing in its stock may be worthwhile. If the company is making most of its capital expenditures to keep old factories operating as long as possible, that may be a sign that it isn't keeping up with new technology.

Compare companies in the same industry to see what type of expenditures each lists in investment activities and the explanations for those expenditures in the notes to the financial statements. Comparing a company with one of its peers helps you determine whether the company is budgeting its capital expenditures wisely.

About This Article

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About the book author:

Lita Epstein, who earned her MBA from Emory University’s Goizueta Business School, enjoys helping people develop good financial, investing and tax-planning skills.
While getting her MBA, Lita worked as a teaching assistant for the financial accounting department and ran the accounting lab. After completing her MBA, she managed finances for a small nonprofit organization and for the facilities management section of a large medical clinic.
She designs and teaches online courses on topics such as investing for retirement, getting ready for tax time and finance and investing for women. She’s written over 20 books including Reading Financial Reports For Dummies and Trading For Dummies.
Lita was the content director for a financial services Web site, MostChoice.com, and managed the Web site, Investing for Women. As a Congressional press secretary, Lita gained firsthand knowledge about how to work within and around the Federal bureaucracy, which gives her great insight into how government programs work. In the past, Lita has been a daily newspaper reporter, magazine editor, and fundraiser for the international activities of former President Jimmy Carter through The Carter Center.

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