The Statement of Cash Flows for Penny Stocks - dummies

The Statement of Cash Flows for Penny Stocks

By Peter Leeds

Penny stock companies keep track of the cash that they generate or spend, and they report the results on the cash flow statement. By reviewing all the movements of money into and out of a corporation, you can gain a clear understanding of its fiscal strength and operational viability.

If you think of the income statement as showing you the profit or loss of a company based on its operations, and the balance sheet as a snapshot of its financial position, then the statement of cash flows tells you all the other ways that the company is generating or spending money.

For example, if a stock raises money by issuing new shares, that amount shows up in cash flow under the item “financing activities.”

The cash flow statement is broken down into the following categories:

  • Operating activities: The profit or loss as displayed on the income statement is included in cash flow as operating activities. If a company made a net profit of $100 on its income statement, that $100 will show up as a gain to cash flow from operations.

  • Investing activities: The results of purchases and sales of long-term assets, such as factories, real estate, or equipment, are categorized as investing activities. The net results of any stock and bond investments a company makes are also included in this section of the cash flow statement.

  • Financing activities: Dividend payments, and the issuance or repurchase of bonds or shares, factor into the statement of cash flows as financing activities.

  • Supplemental information: Supplemental information includes the impact of income taxes, interest payments, and gains or losses on fluctuations in foreign currencies. In addition, significant noncash adjustments or “off the books” items are applied to cash flow as supplemental information.

    For example, if an item owned by the company decreases in potential value by $1 million, even though the corporation has no intention of selling the asset, it may take a $1 million noncash charge. It doesn’t actually lose a million bucks, but the value of its asset is now recorded at what may be a more realistic value.

The best way to think about cash flow is to relate it to your day-to day life. If you leave for work with $50 in your pocket, buy lunch for $11, and find a $5 bill on the street, you end up with $44, or a total decrease of $6. Your cash flow for the day is -$6.


Numerous events impact cash flows, and many of those events are unique to each individual company. As a result, the specific items mentioned in the cash flow statement vary from one company to the next. For example, one company may need to list dividend payments, while another may mention foreign exchange losses and a gain on an increased value of its trademarks.

Of the numerous items you may see listed on cash flow statements, some of the more common categories include

  • Borrowings

  • Dividends

  • Stock offerings

  • Adjustments for changes in foreign exchange rates

  • Loan payments

  • Depreciation

  • Adjustments to goodwill

  • Changes in accounts payable

  • Taxes

When considered along with the income statement and balance sheet, the cash flow statement gives you a very clear and deep understanding of the direction and viability of any company. Especially with penny stocks, which tend to have much more reliance on sufficient cash flow, reviewing the relevant financial reports will help you find fundamentally solid companies that, by extension, are better investments.

Companies often make what are called noncash or off balance sheet adjustments. These are typically changes for bookkeeping purposes rather than reflections of actual profits or losses, and so they may have less of an impact on a company than they at first appear.

For example, if a corporation decides that the value of its trademarks is worth $20 million and the value of its brand name is worth $10 million, it will have $30 million as assets on the books. The company may never sell either, and if it does, it may get even more or far less than is reflected on the financial reports.

Picture management deciding that the company brand name is more accurately valued at $4 million rather than $10 million. In this scenario, it would take a $6 million noncash charge as a loss on the books. That may put the company in a situation where it reports a massive loss for the quarter, which would scare investors, despite the fact that it actually didn’t cost a penny in real life.