What Is Cash Flow From Investing Activities?
Cash flow from investing activities (CFI) is one of the sections on the cash flow statement that reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.
Negative cash flow is often indicative of a company's poor performance.However, negative cash flow from investing activities might be due to significant amounts of cash being invested in the long-term health of the company, such as research and development.
Key Takeaways
- Cash flow from investing activities is a section of the cash flow statement that shows the cash generated or spent relating to investment activities.
- Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets.
- Negative cash flow from investing activities might not be a bad sign if management is investing in the long-term health of the company.
Understanding Cash Flow From Investing Activities
Before analyzing the different types of positive and negative cash flows from investing activities, it's important to review where a company's investment activity falls within its financial statements. There are three main financial statements: the balance sheet, income statement, and cash flow statement.
The balance sheet provides an overview of a company's assets, liabilities, and owner's equity as of a specific date. The income statement provides an overview of company revenues and expenses during a period. The cash flow statement bridges the gap between the income statement and the balance sheet by showing how much cash is generated or spent on operating, investing, and financing activities for a specific period.
Types of Cash Flow
Overall, the cash flow statement provides an account of the cash used in operations, including working capital, financing, and investing. There are three sections–labeled activities–on the cash flow statement.
Cash Flow From Operating
Operating activities include any spending or sources of cash that are involved in a company's day-to-day business activities. Any cash spent or generated from the company's products or services is listed in this section, including:
- Cash received from the sale of goods and services
- Interest payments
- Salary and wages paid
- Payments to suppliers for inventory or goods needed for production
- Income tax payments
Cash Flow From Financing
Cash generated or spent on financing activities shows the net cash flows involved in funding the company's operations. Financing activities include:
- Dividend payments
- Stock repurchases
- Bond offerings–generating cash
Cash Flow From Investing
Cash flows from investing activities provide an account of cash used in the purchase of non-current assets–or long-term assets– that will deliver value in the future.
Investing activity is an important aspect of growth and capital. A change to property, plant, and equipment (PPE), a large line item on the balance sheet, is considered an investing activity. When investors and analysts want to know how much a company spends on PPE, they can look for the sources and uses of funds in the investing section of the cash flow statement.
Capital expenditures (CapEx), also found in this section, is a popular measure of capital investment used in the valuation of stocks. An increase in capital expenditures means the company is investing in future operations. However, capital expenditures are a reduction in cash flow.Typically, companies with a significant amount of capital expenditures are in a state of growth.
Below are a few examples of cash flows from investing activities along with whether the items generate negative or positive cash flow.
- Purchase of fixed assets–cash flow negative
- Purchase of investments such as stocks or securities–cash flow negative
- Lending money–cash flow negative
- Sale of fixed assets–cash flow positive
- Sale of investment securities–cash flow positive
- Collection of loans and insurance proceeds–cash flow positive
If a company has differences in the values of its non-current assets from period to period (on the balance sheet), it might mean there's investing activity on the cash flow statement.
Example of Cash Flow From Investing Activities
Below is the cash flow statement from Apple Inc. (AAPL) according to the company's 10-Q report issued on June 29, 2019.
The three sections of Apple's statement of cash flows are listed with operating activities at the top and financing activities at the bottom of the statement (highlighted in orange). In the center, are the investing activities (highlighted in blue).
Investing activities that were cash flow negative are highlighted in red and include:
- Purchases of marketable securities for $21.9 billion
- Payments acquiring property, plant, and equipment for $7.7 billion
- Payments for business acquisitions and non-marketable securities
Investing activities that were cash flow positive are highlighted in green and include:
- Proceeds from maturities of marketable securities for $26.7 billion
- Proceeds from the sale of marketable securities for $49.5 billion
The net cash flows generated from investing activities were $46.6 billion for the period ending June 29, 2019. Overall Apple had a positive cash flow from investing activity despite spending nearly $8 billion on new property, plant, and equipment.
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As with any financial statement analysis, it's best to analyze the cash flow statement in tandem with the balance sheet and income statement to get a complete picture of a company's financial health.
What Activities Are Included in Cash Flow From Investing Activities?
The activities included in cash flow from investing actives are capital expenditures, lending money, and the sale of investment securities. Along with this, expenditures in property, plant, and equipment fall within this category as they are a long-term investment.
How Do You Calculate Cash Flow From Investing Activities?
Consider a hypothetical example of Google's net annual cash flow from investing activities. For the year, the company spent $30 billion on capital expenditures, of which the majority were fixed assets. Along with this, it purchased $5 billion in investments and spent $1 billion on acquisitions. The company also realized a positive inflow of $3 billion from the sale of investments. To calculate the cash flow from investing activities, the sum of these items would be added together, to arrive at the annual figure of -$33 billion.
Why Is Cash Flow From Investing Activities Important?
Cash flow from investing activities is important because it shows how a company is allocating cash for the long term. For instance, a company may invest in fixed assets such as property, plant, and equipment to grow the business. While this signals a negative cash flow from investing activities in the short term, it may help the company generate cash flow in the longer term. A company may also choose to invest cash in short-term marketable securities to help boost profit.
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Now, let's delve into the concepts presented in the article about Cash Flow From Investing Activities.
Cash Flow From Investing Activities (CFI): Cash Flow From Investing Activities is a crucial section in the cash flow statement that outlines the cash generated or spent on various investment-related activities during a specific period. These activities encompass the purchase of physical assets, investments in securities, and the sale of securities or assets.
Negative Cash Flow From Investing Activities: Negative cash flow from investing activities is often seen as an indicator of poor company performance. However, it's essential to note that in certain cases, negative cash flow may result from significant investments in the company's long-term health, such as research and development.
Financial Statements Overview: The article mentions three main financial statements: the balance sheet, income statement, and cash flow statement. Each serves a distinct purpose in providing a comprehensive view of a company's financial position, performance, and cash flow activities.
Types of Cash Flow: The cash flow statement is divided into three sections: Cash Flow From Operating, Cash Flow From Financing, and Cash Flow From Investing. Each section represents different aspects of a company's financial activities.
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Cash Flow From Operating: Involves day-to-day business activities, including cash received from the sale of goods and services, interest payments, salary and wages paid, and payments to suppliers.
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Cash Flow From Financing: Represents cash generated or spent on financing activities, such as dividend payments, stock repurchases, and bond offerings.
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Cash Flow From Investing: Focuses on cash used in the purchase of non-current assets (long-term assets) that deliver future value. Examples include purchases of fixed assets, investments in stocks or securities, and lending money.
Example of Cash Flow From Investing Activities (Apple Inc.): The article provides an example of Apple Inc.'s cash flow statement, highlighting cash flow negative and positive investing activities. This includes purchases of marketable securities, payments for property, plant, and equipment, as well as proceeds from the sale of marketable securities.
Calculation of Cash Flow From Investing Activities: The article explains how to calculate cash flow from investing activities using a hypothetical example of Google. It involves summing up capital expenditures, investments, acquisitions, and proceeds from the sale of investments.
Importance of Cash Flow From Investing Activities: Cash flow from investing activities is crucial as it reveals how a company allocates cash for the long term. Investments in fixed assets or marketable securities may result in short-term negative cash flow but contribute to long-term profitability and growth.
In conclusion, analyzing cash flow from investing activities is vital for a comprehensive understanding of a company's financial health, and it should be considered in conjunction with the balance sheet and income statement for a more accurate assessment.
