What is Cash flow from Investing Activities?
Cash flow from investing activities refers to cash inflow and outflow of cash from investing in assets (including intangibles), purchasing of assets like property, plant and equipment, shares, debt and from sale proceeds of assets or disposal of shares/debt or redemption of investments like collection from loans advanced or debt issued.
It provides information on cash inflow and outflow related to purchases and sales of assets (Property, Plant & Equipment, etc.), loans made to suppliers or the ones received from the customer, and any payments related to merger & acquisitions.
In a nutshell, we can say that cash flow from investing activities reports the purchase and sale of long-term investments and property, plant, and equipment.
List of Items Included in Cash Flow from Investing Activities
Cash flow from Investments include all the transactions involving acquiring and selling long-term investment, property, plant, and equipment
These items are found in the non-current portion of the balance sheet
- Purchase of property, plant, and equipment (cash outflow)
- Sales of property, plant, and equipment (cash inflow)
- Investment in joint venturesJoint VenturesA joint venture is a commercial arrangement between two or more parties in which the parties pool their assets with the goal of performing a specific task, and each party has joint ownership of the entity and is accountable for the costs, losses, or profits that arise out of the venture. and affiliates (cash outflow)
- Payments for business acquired (cash outflow)
- Proceeds from sales of assets (cash inflow)
- Investments in marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company's balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it. (cash outflow)
It is always easier to understand when we create some questions and then answer them. So here are a few questions which, when answered, would help us in understanding the topic in an easier manner.
- What happens to the cash account of the company that has purchased land?
- What happens to the cash account of the company sold land?
Answer to Question 1: In this case, the cash account would decrease, as the company would need to pay some cash for the land purchased. The double entry system of accounting would lead to an increase in assets account. In this case, asset accountAsset AccountAsset Accounts are one of the categories in the General Ledger Accounts holding all the credit & debit details of a Company’s assets. The examples include Short-Term Investments, Prepaid Expenses, Supplies, Land, equipment, furniture & fixtures etc. under consideration is Property, Plant & Equipment.
Answer to Question 2: In this case, the cash account would increase, as the company would get cash for the land sold. The double entry system of accounting would lead to a decrease in assets account. In this case, asset account under consideration is Property, Plant & Equipment.
Cash Flow from Investment Example (Basic)
Let us assume that Mr. X starts a new business and has planned that at the end of the month, he will prepare his financial statements like income statement, balance sheet, and cash flow statementCash Flow StatementStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities..
1st month: There was no revenue in the first month and no such operating expenseSuch Operating ExpenseOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.; hence income statement will result in net income to be zero. In cash flow from investing activities, there was no activity, too. Hence it will remain at zero.
|Cash from Investing activities (for the first month)|
|Investing Activities||$ –|
2nd Month: The Company made some investment in land and property during the month amounting to $100000. This is cash outflow and hence negative.
|CFI (at the end of the second month)|
|Investing Activities||$ – 100000|
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How to Calculate Cash Flow from Investments?
Let’s calculate CFI when we have the balance sheet data.
Also, assume that the gain on the sale of land is $20,000
As we already know that CFI is related to non-current asset portions of the balance sheetNon-current Asset Portions Of The Balance SheetNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark.. There are two main items in non-current assets – Land and Property, Plant, and Equipment.
- Cash inflow from sale of Land = Decrease in Land (BS) + Gain from Sale of Land = $80,000 – $70,000 + $20,000 = $30,000
- Cash outflow from purchase of property plant and equipmentProperty Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. (PPE) = $120,000 – $170,000 = -$50,000
- Cash flow from Investments formula = Cash inflow from Sale of Land + Cash outflow from PPE = $30,000 – $50,000 = -$20,000
CFI is an outflow of $20,000
Cash Flow from Investing Activities Example (Apple)
Now let us have a look at few more sophisticated cash flow statement for companies which are listed entities in NYSE.
source: Apple 10K Filings
- Apple’s cash flow from investment activities was an outflow of $45.977 bn.
- Apple is heavily investing in the purchase of marketable securities (cash outflow). Apple purchased $142.428 bn worth of marketable securities in 2015!
- In addition, Apple generated cash inflows by selling these marketable securities (cash inflows). Apple sold its marketable securities and generate $90.536 bn as cash inflows.
- In addition, Apple invested in the acquisition of property, plant, and equipment to the tune of $12.73bn in 2015.
Cash Flow from Investing Activities Example (Amazon)
source: Amazon SEC filings
Now let us interpret the above CFI and how indicative it is of the situation of the company. Some important points on Amazon’s CFI are:
- Amazon has continuously invested in the Purchase of property and equipment, including software and web development. Amazon’s cash outflow for this was $4.590bn and $4.893 bn in 2015 and 2014, respectively.
- You should be mindful that expenses under this head can be of a great indication of where the company is heading to.
- The quality of Capex can be determined by reading the management discussion & analysis. This will provide great insights into where the company is planning to be in the next few years. Some important points to look in Capex are (i) quality of Capex (ii) business proposition of the linked Capex (iii) proportion of the maintenance CAPEX.
- Another important point about Amazon’s cash outflows is that they have been acquiring smaller companies each year. They made acquisitions worth $795 million in 2015.
- Amazon has been generating cash inflows by selling its marketable securities. Amazon sold $3.025bn dollars of marketable securities in 2015.
Cash Flow from Investing Activities Example (JPMorgan Bank)
Below is the CFI from JPMorgan Chase.
source: JPMorgan SEC Filings
Since this entity is a bank, a lot of line items will be completely different from what it is for others. There are many line items that are only applicable to banks or companies in financial services. Now let us interpret the above statements and how indicative it is of the situation of the company. Some important points from JPMorgan’s cash flow from investing activities are:
- JPMorgan’s investing activities predominantly include loans originated to be held for investment, the investment securitiesInvestment SecuritiesInvestment securities are purchased by investors, with or without the assistance of a middleman or agent, solely for the purpose of investment and long-term holding. These are recorded in the financial statements as non-current investments and comprise fixed income and variable income bearing securities. portfolio, and other short-term interest-earning assets.
- Also, note that the cash flow from investments was $106.98 bn (cash inflow) in 2015, primarily because of the deposits with the bank to the tune of $144.46 bn.
- Other changes in loan resulted in a cash outflow of $108.9 bn in 2015 as compared to a much lower number in prior years.
What analyst should know?
Till now, we have seen three different companies in three different industries and how cash means different for them. For a product company, cash is the king. For the service company, it is a way to run a business, and for a bank, it is all about cash. These three companies have different things to offer in the cash flow from Investing activities part of the cash flow statement. However, it is important and imperative to understand the statement should not be singled out and seen. They should always be seen in conjuncture and a combination of other statements and management discussionManagement DiscussionMD&A or management discussion and analysis is the part of financial statements where the company’s management discusses the company’s current performance using qualitative and quantitative measures to realize the details that otherwise would not have been available for analysis. & analysis.
Also, you should note that cash flow from investments provides us with a trend analysis of the companies capital expenditureAnalysis Of The Companies Capital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year. (will help understand if the company is in a growing or a steady phase). This is very useful when we are projecting the financial statements of the companyThe Financial Statements Of The CompanyFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels..
Another interesting aspect to look into this CFI is the column of proceeds from the disposal of fixed assets, proceeds of the disposal of a business. If the figures are substantially high, it can help in the visualization of why the company is disposing of assets.
Cash flow from Investing Activities is the second of the three parts of the cash flow statement that shows the cash inflows and outflows from investing in an accounting year; investing activities includes cash flows from the sale of fixed asset, purchase of a fixed asset, sale and purchase of investment of business in shares or properties, etc. Investors earlier use to look into the income statement and balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. for clues about the situation of the company. However, over the years, investors have now also started looking at each one of these statements alongside the conjunction of cash flow statements. This actually helps in getting the whole picture and also helps to take a much more calculated investment decision.
As we have seen throughout the article, we are able to see that cash flow from investing activities is a great indicator of the core investing activity of the company.
Video on Cash Flow from Investing Activities
This has been a guide to Cash Flow from Investing Activities, formula, and its calculations. Here we also look at Cash Flow from Investments examples of Apple, Amazon & JPMorgan.