Cash Flow Statement Glossary
The cash flow statement tracks the actual movement of cash in and out of a business over a period. While the income statement can be shaped by accounting decisions (depreciation methods, revenue recognition timing, accruals), the cash flow statement is far harder to manipulate. Cash either came in or it didn’t.
For value investors, this is arguably the most important financial statement. A profitable company on paper can still go bankrupt if it doesn’t generate enough cash. Conversely, a company with modest reported earnings but strong cash generation may be a hidden gem. The cash flow statement separates operating reality from accounting fiction.
The statement is divided into three sections: Operating Activities (cash from running the business), Investing Activities (cash spent on or received from long-term investments), and Financing Activities (cash from or to shareholders and lenders).
Operating Activities
Operating cash flow represents the cash generated (or consumed) by the company’s core business operations. This is the engine that drives long-term value.
Net Income
The starting point for the cash flow statement (under the indirect method). Net income from the income statement is then adjusted for non-cash items and changes in working capital to arrive at operating cash flow.
Why value investors care: Starting with net income and then seeing all the adjustments required to reach actual cash gives you a clear picture of earnings quality. If the adjustments are consistently large and negative, the company’s reported earnings overstate its true cash generation.
Depreciation and Amortization
A non-cash expense added back to net income because it reduces reported earnings but doesn’t involve an actual cash outflow in the period.
Why value investors care: D&A is the largest add-back for most companies. While it’s added back here (because no cash left the building), the underlying assets do wear out and eventually need replacing. Value investors compare D&A to capital expenditures: if capex consistently exceeds D&A, the company is investing for growth; if capex roughly equals D&A, the company is merely maintaining its existing assets.
Stock-Based Compensation
A non-cash expense added back to net income. The company compensates employees with equity instruments instead of cash.
Why value investors care: Stock-based compensation (SBC) is a real cost to shareholders — it dilutes their ownership — but it doesn’t reduce cash. Technology companies in particular rely heavily on SBC. Value investors view SBC as a real expense that should be subtracted when assessing true earnings power, even though it’s added back in the cash flow statement. Companies with SBC exceeding 10-15% of revenue are giving away significant ownership to employees each year.
Deferred Income Tax
The non-cash portion of income tax expense arising from timing differences between tax reporting and financial reporting.
Why value investors care: A positive deferred income tax add-back means the company paid less actual tax than it reported on the income statement (often due to accelerated depreciation for tax purposes). This is generally fine in the short term, but those taxes will eventually come due. Value investors monitor whether deferred tax liabilities are growing indefinitely or if they’re actually reversing.
Other Non-Cash Items
All other non-cash adjustments to reconcile net income to operating cash flow, including impairments, unrealized gains/losses, and various accrual adjustments.
Why value investors care: Large “other non-cash items” require investigation. Frequent impairments or write-downs suggest poor capital allocation in the past. Consistent positive adjustments from unrealized gains may not be sustainable. The footnotes are essential here.
Changes in Working Capital
The net change in the company’s short-term operating assets and liabilities (receivables, inventory, payables, etc.) during the period.
Why value investors care: Working capital changes reveal the cash cost of growth. A growing business often needs to invest in inventory and extend credit to customers (increasing receivables), both of which consume cash. Conversely, a company that collects cash from customers before paying suppliers (negative working capital, like Amazon) generates cash as it grows. Value investors love businesses where growth generates cash rather than consuming it.
Accounts Receivables
The cash impact of changes in money owed by customers.
Why value investors care: An increase in receivables means the company recognized revenue but hasn’t collected the cash yet — a cash outflow. Consistently growing receivables faster than revenue signals deteriorating collection quality or aggressive revenue recognition. Value investors want to see receivables growth in line with (or slower than) revenue growth.
Inventory
The cash impact of changes in goods held for sale.
Why value investors care: An increase in inventory is a cash outflow — the company spent cash to produce or purchase goods that haven’t been sold yet. Rising inventory levels can foreshadow markdowns, obsolescence, or slowing demand. Value investors watch inventory trends carefully, especially in retail, manufacturing, and technology. A sudden inventory build followed by margin compression is a classic value trap signal.
Accounts Payables
The cash impact of changes in money owed to suppliers.
Why value investors care: An increase in payables means the company received goods or services but hasn’t paid for them yet — effectively a cash inflow. Companies that can extend payment terms (increasing payables) while maintaining good supplier relationships have a cash flow advantage. This is the “use other people’s money” principle at work.
Other Working Capital
Changes in other operating assets and liabilities not separately listed, such as prepaids, accrued expenses, and deferred revenue.
Why value investors care: Large swings in other working capital can significantly impact operating cash flow. Increases in deferred revenue (a liability) are cash inflows — customers paid in advance. Value investors should understand what’s driving these changes to assess whether they’re sustainable.
Operating Cash Flow
The total cash generated by the company’s core business operations.
Why value investors care: Operating cash flow is the lifeblood of the business. A company must generate positive operating cash flow to sustain itself without external financing. Value investors compare operating cash flow to net income: ideally, operating cash flow should equal or exceed net income. If net income consistently exceeds operating cash flow, the earnings are low quality (the company is booking profits it hasn’t collected in cash). The operating cash flow to sales ratio (OCF / revenue) reveals how efficiently the company converts sales into cash.
Income Taxes Paid
The actual cash taxes paid during the period, as opposed to the income tax expense on the income statement.
Why value investors care: The gap between income tax expense (on the income statement) and actual taxes paid reveals timing differences and tax planning effectiveness. Value investors prefer companies that don’t rely on aggressive tax strategies that could unwind.
Interest Paid
The actual cash paid for interest on debt during the period.
Why value investors care: Interest paid reveals the real cash cost of the company’s debt. Compare to interest expense on the income statement (which may include non-cash accrued interest). Value investors use interest paid to calculate cash-based interest coverage ratios, which are more conservative than income-statement-based ratios.
Investing Activities
Investing activities capture the cash spent on or received from the company’s long-term investments. This section reveals how management allocates capital for the future.
Capital Expenditure
Cash spent on purchasing or improving physical assets like property, equipment, and infrastructure.
Why value investors care: Capex is the cost of maintaining and growing the business’s productive capacity. Value investors distinguish between “maintenance capex” (spending required to keep existing assets functional) and “growth capex” (spending to expand capacity). Only growth capex is truly discretionary. Companies with low capex requirements relative to operating cash flow generate abundant free cash flow, making them more attractive investments. Capex is subtracted from operating cash flow to calculate free cash flow.
Investments in Property, Plant and Equipment
Cash spent specifically on property, plant, and equipment purchases. Often overlaps with or equals capital expenditure.
Why value investors care: This is the tangible investment in the business’s physical infrastructure. Consistently high spending here, relative to depreciation, indicates the company is expanding its physical footprint. Value investors compare this to revenue growth to assess whether the investment is generating returns.
Acquisitions Net
Net cash spent on acquiring other businesses, minus any cash acquired in those transactions.
Why value investors care: Acquisitions are major capital allocation decisions. Value investors scrutinize acquisition spending because it reveals management’s strategy and discipline. Companies that make frequent, expensive acquisitions often destroy shareholder value — studies consistently show that the majority of acquisitions fail to create value for the acquirer. Value investors prefer organic growth or small, disciplined acquisitions at reasonable prices. Track total acquisition spending over 5-10 years and compare to the resulting revenue and profit growth.
Purchases of Investments
Cash used to buy financial investments such as stocks, bonds, or other securities.
Why value investors care: Large investment purchases may indicate the company is deploying excess cash into the capital markets rather than into its own operations. This can be prudent cash management or it could signal that management sees limited opportunities to reinvest in the business. Value investors should understand what’s being purchased and why.
Sales/Maturities of Investments
Cash received from selling investments or from investments that have matured.
Why value investors care: This is the cash returned from the company’s investment portfolio. Timing of these sales can significantly impact free cash flow in any given period. Value investors look at the net of purchases and sales to understand the overall investment activity.
Other Investing Activities
Cash flows from other long-term investing activities not separately categorized.
Why value investors care: Check for unusual items — asset sales, divestitures, or other one-time cash events can inflate investing cash flows in a given period and may not recur.
Net Cash Provided by Investing Activities
The total net cash spent on or received from all investing activities.
Why value investors care: A consistently negative number is normal and healthy — it means the company is investing in its future. However, the magnitude matters. Compare investing cash flows to operating cash flows: if the company is consistently spending more on investments than it generates from operations, it must fund the gap through financing (debt or equity). Value investors prefer companies that can fund their investment needs entirely from operating cash flow.
Financing Activities
Financing activities capture cash flows between the company and its capital providers — shareholders and lenders. This section reveals how the company funds itself and returns capital.
Net Debt Issuance
The net cash received from (or repaid to) lenders during the period.
Why value investors care: Positive net debt issuance means the company is borrowing more; negative means it’s paying down debt. Value investors generally prefer companies that are reducing debt over time, as deleveraging increases the equity claim on future cash flows. However, borrowing to fund high-return investments can be sensible if the return on invested capital exceeds the cost of debt.
Long-Term Net Debt Issuance
The net cash from issuing new long-term debt minus repayments of existing long-term debt.
Why value investors care: Long-term debt issuance locks in financing for extended periods. Value investors pay attention to the interest rates and terms. A company refinancing debt at lower rates is reducing its cost of capital. A company issuing debt at rising rates may face increasing interest burdens.
Short-Term Net Debt Issuance
The net change in short-term borrowings during the period.
Why value investors care: Reliance on short-term debt is riskier because it must be refinanced frequently. During credit crunches, short-term financing can dry up quickly. Value investors prefer companies with minimal short-term debt dependence.
Common Stock Issuance
Cash received from issuing new common shares.
Why value investors care: New share issuance dilutes existing shareholders. While raising equity capital is sometimes necessary (to fund growth or strengthen the balance sheet), frequent equity issuances at low prices destroy shareholder value. Value investors view persistent share issuance, especially to fund operations rather than growth, as a negative signal.
Common Stock Repurchased
Cash spent on buying back the company’s own shares.
Why value investors care: Share buybacks reduce the share count, increasing each remaining share’s claim on future earnings and cash flow. When done at attractive valuations, buybacks are one of the most shareholder-friendly capital allocation decisions. Buffett considers well-timed buybacks at below intrinsic value to be one of the best uses of excess cash. However, buybacks funded by debt or executed at overvalued prices destroy value.
Net Common Stock Issuance
The net cash impact of all common share transactions.
Why value investors care: A consistently negative number (more buybacks than issuances) indicates the company is a net returner of capital through equity — reducing the share count over time. This creates a compounding effect for long-term shareholders. A positive number means the company is a net issuer — diluting shareholders. Track this alongside stock-based compensation to see the total dilution picture.
Net Stock Issuance
The net of all stock issuance and repurchase activity, including both common and preferred stock transactions.
Why value investors care: This gives the complete picture of equity capital flows. A company issuing preferred stock while repurchasing common stock may be restructuring its capital, which has implications for common shareholders.
Net Preferred Stock Issuance
Cash from issuing preferred stock minus any preferred stock retirements.
Why value investors care: Preferred stock issuance creates a senior claim on dividends and assets. It’s typically a sign that the company couldn’t (or chose not to) raise capital through common equity or debt at favorable terms. For common shareholders, preferred stock represents a prior claim that must be satisfied before they receive anything.
Common Dividends Paid
Cash paid to common shareholders as dividends.
Why value investors care: Dividends are a direct return of capital to shareholders. Consistent and growing dividends signal financial strength and management confidence in future cash flows. Value investors calculate the dividend payout ratio (dividends / net income or dividends / free cash flow) to assess sustainability. A company paying out more than its free cash flow in dividends is borrowing or depleting reserves to fund the dividend — an unsustainable practice.
Preferred Dividends Paid
Cash paid to preferred shareholders as dividends.
Why value investors care: Preferred dividends must be paid before common dividends. Large preferred dividend obligations reduce the cash available to common shareholders and can constrain the company’s financial flexibility.
Net Dividends Paid
The total cash returned to all shareholders through dividend payments.
Why value investors care: This is the total cash outflow for dividends. Compare to free cash flow to determine the cash-based payout ratio. A payout ratio under 60-70% of free cash flow is generally sustainable. Above that, the dividend may be at risk during downturns.
Other Financing Activities
Cash flows from other financing transactions, such as proceeds from exercise of stock options, payment of debt issuance costs, or other capital transactions.
Why value investors care: Option exercise proceeds are cash inflows that partially offset the dilution from stock-based compensation. Other items here can include debt issuance costs, settlement of financing obligations, or other unusual transactions. Investigate large amounts.
Net Cash Provided by Financing Activities
The total net cash received from (or returned to) lenders and shareholders.
Why value investors care: A consistently negative financing cash flow, combined with positive operating cash flow, is the sign of a mature, self-funding business that returns capital to stakeholders. A positive financing cash flow means the company is raising capital — which is normal for growing companies but concerning for mature businesses that should be self-sustaining.
Free Cash Flow
Free Cash Flow
The cash remaining after the company has funded its operations and maintained its physical assets.
Why value investors care: Free cash flow is the single most important metric for value investors. It represents the cash that can be returned to shareholders (through dividends and buybacks), used to reduce debt, or reinvested in growth — all at management’s discretion. Companies that consistently generate strong free cash flow have the financial flexibility to create shareholder value regardless of market conditions. The price-to-free-cash-flow ratio is often a more reliable valuation metric than the P/E ratio because cash flow is harder to manipulate than earnings. Buffett’s concept of “owner earnings” is essentially free cash flow adjusted for maintenance capex.
Cash Position
Cash at Beginning of Period
The cash balance when the reporting period started.
Why value investors care: This is the starting point for tracking cash movements. Comparing the beginning and ending cash balances shows the net cash generation or consumption during the period.
Cash at End of Period
The cash balance when the reporting period ended.
Why value investors care: This should match the cash and cash equivalents reported on the balance sheet for the same date. A growing cash balance over time indicates the company generates more cash than it spends. A declining cash balance may signal the company is burning through its reserves.
Net Change in Cash
The total increase or decrease in cash during the period.
Why value investors care: Net change in cash is the sum of operating, investing, and financing cash flows plus the effect of exchange rate changes. Sustained negative net change in cash is unsustainable — the company will eventually need to raise capital or cut spending.
Effect of Forex Changes on Cash
The impact of exchange rate fluctuations on the company’s cash balances held in foreign currencies.
Why value investors care: For companies with significant international operations, currency movements can materially affect reported cash balances without any underlying business change. Value investors should separate genuine cash generation from currency translation effects. A company that appears to be losing cash may simply be experiencing a strong domestic currency.
Reporting Metadata
Date
The end date of the reporting period.
Period
The reporting frequency — annual (FY) or quarterly (Q1, Q2, Q3, Q4).
Fiscal Year
The fiscal year to which the period belongs.
Filing Date
The date the report was filed with the SEC.
Accepted Date
The date the SEC accepted the filing.
CIK
The Central Index Key — the SEC’s unique identifier for the filing entity.
Symbol
The stock ticker symbol.
Reported Currency
The currency denomination of all figures.
Why value investors care about metadata: Cash flow statements cover a period of time (unlike the balance sheet, which is a point-in-time snapshot). Always compare the same periods: annual to annual, or quarter to quarter. Quarterly cash flows can be lumpy due to seasonal patterns, so annualized figures provide a clearer picture for valuation purposes.