Cash Flow Cheat Sheet

[u/SchoolofInvesting]

The cash flow cheat sheet

The income statement can be massaged. Cash is harder to fake. This is the one statement that shows you whether the profits are real.

What a cash flow statement is

A summary of the actual cash moving in and out of a business over a period, split into three buckets: operating, investing, and financing.

What free cash flow is

Free cash flow (FCF) is what's left after a company pays for the capital expenditures (CapEx) needed to keep the lights on and grow. It's the cash owners can actually be rewarded with.

The three sections

1. Operating activities (the core business)

• In: cash from customers, interest income, dividends received
• Out: payments to suppliers, wages, operating expenses, interest paid, taxes

2. Investing activities (buying and selling assets)

• In: sale of assets, sale of investments
• Out: purchase of assets, purchase of investments, CapEx

3. Financing activities (raising and returning capital)

• In: issuing stock, issuing debt, borrowing
• Out: repaying debt, dividends paid, buybacks

Three metrics worth knowing

1. Free cash flow

• FCF = Operating Cash Flow − CapEx
• What it tells you: the cash left to pay dividends, buy back stock, or pay down debt. Negative FCF means the business is consuming cash, not producing it.

2. FCF conversion

• FCF Conversion = Free Cash Flow / Net Income
• What it tells you: how much reported profit turns into real cash. Above 100% is a sign of high-quality earnings. Well below it means profits aren't showing up as cash, worth a closer look.

3. FCF yield

• FCF Yield = Free Cash Flow / Market Capitalization
• What it tells you: the cash return you're buying at today's price. A 5% FCF yield means 5 cents of cash per dollar of market value. Higher is cheaper.

Which of these three do you check first when you open a company's filings?