How to read a cash flow statement
Cash is much harder to fake than profit — which makes the cash flow statement the most honest of the three. Here's how to read it.
Why it's the honest one
Of the three financial statements, the cash flow statement is often the most trustworthy — because cash is much harder to massage than accounting profit. It tracks the actual money moving in and out of a business, split into three buckets.
The three sections
- Operating activities — cash generated by the core business. This is the one to watch: healthy, growing operating cash flow is the sign of a real, self-funding business.
- Investing activities — cash spent on (or raised from) long-term assets, including capital expenditure and acquisitions.
- Financing activities — cash from issuing or repaying debt, issuing shares, buybacks and dividends.
The number that matters most
Take operating cash flow, subtract capital expenditure, and you get free cash flow — the genuinely spare cash a business produces. It's the figure Oak Growth forecasts and discounts to estimate intrinsic value, precisely because it's so hard to fake.
The classic warning sign: a company reporting rising profits but flat or falling operating cash flow. When profit and cash diverge for long, trust the cash.