Financial Reports: How to Read the Statement of Cash Flows for Investing Activities
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.