As you know, stock prices and trends aren't everything when evaluating if a company is worth investing in. A simple financial report can tell a lot about where a company has been and where it's headed.
How Do Cash Flow from Investing Activities Work?
Cash flow from investing activities provides information on all inbound and outbound cash from the purchases, sales, or swaps of long-term assets, such as equipment, mergers or acquisitions, property, and plants.
You’ll find this information on a company’s cash flow statement. From an accounting perspective, a cash flow statement is a financial statement breaking down cash flows from operations, investing, and financial activities. This information is vital for lenders, creditors, shareholders, and potential investors, as it reveals the company's short term viability, or in layman’s terms, the ability to pay its bills.
Here’s what a company’s cash flow statement would look like. Notice the three main sections: operations, investing activities, and financing activities.
What is Included in Cash Flows from Investing?
Cash flow from investing activities is a section of the cash flow statement that shows the aggregate effect of a company's long-term investments and asset acquisitions. It includes cash flows from purchases or sales of property, plant, and equipment; investments in debt and equity instruments; and mergers and acquisitions.
The cash outflows associated with investing activities include the purchase of fixed assets such as land, buildings, equipment, vehicles, furniture, etc., as well as any payments made to acquire other businesses. The cash inflows associated with investing activities include proceeds from the sale of these assets or businesses.
Investing activities also include any money spent on research and development (R&D) projects or on acquiring new intellectual property rights such as patents or trademarks. Money received from licensing agreements may also be included in this category. Additionally, some companies may have long-term investments in stocks, bonds, or mutual funds that are not intended for immediate sale but held for investment purposes over a period of time. These investments are also typically included in cash flow from investing activities.
Ultimately, investors will use cash flow from investing activities to determine how much capital a company has invested in its operations and what kind of returns those investments have generated over time. This information can help investors evaluate whether a company has made wise use of its resources and whether it is making strategic decisions about long-term investments or simply wasting money on unnecessary purchases.
How Do You Calculate Cash Flow?
To calculate cash flow, you need to consider the cash inflows and outflows related to investments made by the company. Here are the steps to calculate cash flow for investing activities:
1. Identify cash inflows: This includes cash received from the sale of long-term assets, such as property, plant, and equipment, or investments in other companies. It also includes any interest or dividends received from investments.
2. Identify cash outflows: This includes cash paid for the purchase of long-term assets or investments, such as property, plant, and equipment, or investments in other companies. It also includes any loans made to others.
3. Calculate net cash flow: Subtract the total cash outflows from the total cash inflows. The resulting figure represents the net cash flow from investing activities.
It's important to note that cash flow from investing activities is just one component of the overall cash flow statement, which also includes cash flow from operating activities and financing activities. The cash flow statement provides insights into how a company generates and uses cash during a specific period of time.
Why is Cash Flow from Investing Activities Important?
The net cash flow from investing activities tells prospective shareholders a couple of things. Obviously, the first is that it gives an indication of future growth. For example, if the net amount is negative, the company could be making investments because it plans on growing.
Investors should also take note because it is one of the largest cash flows generated in the statement. In manufacturing industries, where capital is abundant and expensive, the piece of the pie is even larger. So, depending on the industry, this number may fluctuate.
Let’s break what’s inside this line item.
Component 1: Cash Receipts
Cash receipts is cash received - a positive cash flow. This section includes any type of cash from sales from property and securities or collection of principal.
- Sale of property and equipment: This number includes the sale of any capital used in the business. The sale of equipment, space, software, hardware, and buildings would all fit on this line. Companies may be selling equipment in order to finance other equipment upgrades or to downsize.
- Collection of principal on loans: When a company loans out money, they expect to collect principal from the other entity.
- Sale of investment securities: Cash inflows from the sale of any security, including stocks, bonds, and more.
Component 2: Cash Paid
Cash paid is cash paid out to another entity- a negative cash flow. This section includes outflows from the purchase of property and equipment, making loans, and the purchase of securities.
- Purchase of property and equipment: The purchase of any capital used in the business. If this number is high, it may be because the company plans to purchase property and equipment so it can grow.
- Making loans to other entities: Some companies will make loans to other growing companies.
- Purchase of investment securities: A company purchases stock, bonds, or other securities as a way to generate income, increase net worth, and keep a financial safety net.
Mastering Business Operations with Cash Flows
While examining a company’s cash flow statement, it’s imperative that you look at its cash flow from investing activities. Of course, the cash flow statement is only one component in determining if a company is worth investing in. Oftentimes, you’ll be able to see if the firm is in growth mode from its purchase of capital, giving out loans, and purchase of securities. For some investors, this could be critical in determining if they want to buy stocks in a growing firm - or stay far away.
Frequently Asked Questions
What is the meaning of investing activities?
Investing activities refer to the acquisition, disposal, and management of long-term assets by a company or individual. These activities involve the purchase or sale of property, plant, and equipment (PP&E), investments in stocks and bonds, and the lending or borrowing of funds. Investing activities are crucial for businesses and individuals to grow their wealth and generate income over the long term. They are recorded in the cash flow statement of a company’s financial statements to provide insights into the cash flow generated or utilized through these activities.
What is the difference between investing activities and financial activities?
Investing activities refer to the buying and selling of long-term assets or investments that are not considered part of the company’s normal operations. Financing activities involve transactions that affect the company’s capital structure and its borrowing or repayment of funds.
What does negative cash flow from investing activities mean?
Negative cash flow from investing activities means that a company’s cash outflows from investments, such as the purchase of long-term assets or investments in other companies, exceed the cash inflows generated from those investments. This indicates that the company is spending more on investments than it is generating in returns or profits from those investments. It can be a sign that the company is facing financial challenges or is making significant investments for future growth.
About Luke Jacobi
Luke Jacobi is a distinguished professional known for his role as President at Benzinga, a renowned financial media outlet. With a background in business operations and management, Luke brings valuable expertise to his position, overseeing various aspects of Benzinga’s operations. His contributions play a crucial role in the company’s success, ensuring efficiency and effectiveness across different departments. Prior to his role at Benzinga, Luke has held positions that have honed his skills in leadership and strategic decision-making. With a keen understanding of the financial industry and a commitment to driving innovation, Luke continues to make significant contributions to Benzinga’s mission of providing high-quality financial news and analysis.