cash flow investment & finance definition
The
cash available to a business generated from its operations. A positive cash
flow means that the net operating income is sufficient to cover expenses. A
negative cash flow shows that expenses exceed revenues. A corporation issues a
statement of cash flow with its quarterly and yearly earnings report. The
statement shows where the company received its funds from and where they were
spent. A popular measurement of cash flow, especially among Wall Street
analysts, is free cash flow, which is cash flow left after expenses, capital
expenditures, dividends, and debt service has been paid, although some
companies may slightly vary what comprises free cash flow. The concept of free
cash flow gained followers after the bear market that started in 2000 brought into
question the quality of companies’ financial statements.
See cash flow in Wall Street Words
The amount of net cash generated by an investment or a business during a specific period. One measure of cash flow is earnings before interest, taxes, depreciation, and amortization. Because cash is the fuel that drives a business, many analysts consider cash flow to be a company's most important financial statistic. Firms with big cash flows are frequently takeover targets because acquiring firms know that the cash can be used to help pay off the costs of the acquisitions. See also
free cash flow.
Financial analysts generally consider cash flow to be the best measure of a company's financial health. Increased cash flow means more funds are available to pay dividends, service or reduce debt, and invest in new assets. On the other hand, reported net income is heavily influenced by a firm's accounting practices. Reduced income generally means lower taxes and more cash, thus the same accounting practices that reduce net income can actually increase cash flow. A firm with large amounts of new investments and corresponding high depreciation charges might report low or negative earnings at the same time it has large cash flows to service debt and to acquire additional assets. Cable companies have huge investment requirements and are typical of firms that may be quite healthy in spite of reporting net losses. In early 1996, TCI Communications, at the time the nation's largest cable operator, reported fourth-quarter results that included a net loss of $70 million, more than double the loss reported in the year-earlier quarter. At the same time, the firm added more than a million new customers and reported a 25% increase in revenues. It also reported a 5% increase in cash flow. Thus, although TCI reported an additional loss, the quarter was generally considered quite successful. Operating cash flow, calculated as cash flow (the sum of net income and noncash expenses such as depreciation, depletion, and amortization) plus interest expense plus income tax expense, is an important consideration in corporate acquisitions because it indicates the cash flow that is available to service a firm's debt.
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