Ask Dr Invest

Q: I am an investor who regularly keeps an eye on macro and micro issues. However, I do look at financial data such as low PE, PB, NAV, stable dividend and also balance sheet of companies.

Recently, I have started looking at the cash flow statements of companies I am interested in. But I am not sure what to look out for in the cash flow statement. Please advise on this. Thank you.

A: The cash flow statement is important to investors because it shows how much actual cash a company has generated.

Cash generation is crucial to an entity's solvency and survival; cash ensures financial obligations are consistently met and represents resources for business growth.

Cash flow statements should be analysed together with other accounting statements for a better picture of the overall health of a company.

Many companies have shown profits on the income statement but stumbled later because of insufficient cash flow.

The statement of cash flow is separated into three sections: cash flow from operating activities, from investing activities, and from financing activities.

The section on cash flow from operating activities shows how much cash the company generated from its core business.

Investors should look closely at how much cash a firm generates from its operating activities because it paints the best picture of how well the business is producing cash that will ultimately benefit shareholders.

The cash flow from investing activities section shows the amount of cash firms spent on investments, usually classified as either capital expenditure or monetary investments.

The cash flow from financing activities section includes any activity involved in transactions with the company's owners or debtors - for example, dividends paid to investors.

Generally, the more cash available for business operations, the better.

However, a negative cash flow may result from a company's growth strategy in expanding its operations.

The cash flow statement is simply a piece of a greater puzzle.

Adjusting earnings, revenues, assets and liabilities, investors can gain a more holistic insight into a company's financial health.

All said, education and research constitute the foundation of successful investing.

It is prudent to be aware of your risk appetite and conduct your own due diligence to back every investment decision.

You must always understand what you are investing in before making a decision.

This article was first published in The Business Times.