source: Colgate SEC Filings
Cash flow from investing activities provides information of 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 nut shell, we can say that cash flow from investing activities reports the purchase and sale of long-term investments and property, plant and equipment.
In this article, we look at cash flow from Investments in detail –
- Items included in Cash Flow from Investments?
- Cash Flow from Investment – Simple Example
- Calculating Cash Flow from Investments
- Cash Flow from Investments – Apple Example
- Cash Flow from Investments – Amazon Example
- Cash Flow from Investments – JPMorgan Bank Example
- What analyst should know about the Cash Flow from Investments
Items included in Cash Flow from Investments?
Cash flow from Investments include all the transactions involving acquiring and selling long-term investment, property, plant, and equipment
These items are found in 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 ventures and affiliates (cash outflow)
- Payments for business acquired (cash outflow)
- Proceeds from sales of assets (cash inflow)
- Investments in marketable securities (cash outflow)
It is always easier to understand when we create some questions and then answer them. So here are 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 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 increase in assets account. In this case asset account 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 the decrease in assets account. In this case asset account under consideration is Property, Plant & Equipment.
Cash Flow from Investment – Simple Example
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 statement.
1st month: There was no revenue in the first month and no such operating expense 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 did some investment in land and property during the month amounting to $100000. This is cash outflow and hence negative in the cash flow statement.
|Cash from Investing activities (at the end of second month)|
|Investing Activities||$ – 100000|
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Calculating Cash Flow from Investments
Let’s calculate Cash Flow from Investments when we have the balance sheet data.
Also, assume that the gain on sale of land is $20,000
Calculate Cash Flow from Investments
As we already know that cashflow from investments is related to non-current asset portions of the balance sheet. 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 equipment (PPE) = $120,000 – $170,000 = -$50,000
- Cash flow from Investments = Cash inflow from Sale of Land + Cash outflow from PPE = $30,000 – $50,000 = -$20,000
Cash flow from Investments is an outflow of $20,000
Cash Flow from Investments – Apple Example
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 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 Investments – Amazon Example
source: Amazon SEC filings
Now let us interpret the above statements and how indicative it is of the situation of the company. Some important points on Amazon’s Cash flow from investing activities are:
- Amazon has continuously invested in Purchase of property and equipment including software and web development. Amazon 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 great indication on where the company is heading to.
- The quality of Capex can be determined by reading the management discussion & analysis. This will provide great insights on where the company is planning to be in 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 their marketable securities. Amazon sold $3.025bn dollars of marketable securities in 2015.
Cash Flow from Investments – JPMorgan Bank Example
Below is the cash flow from Investments from JPMorgan Chase.
source: JPMorgan SEC Filings
Since this entity is a bank, lot of line items will be completely different from what it is for others. There are many line items which 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 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 about the Cash Flow from Investments
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 combination of other statements and management discussion & analysis.
Also, you should note that cash flow from investments provide us with trend analysis of the companies capital expenditure (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 company.
Another interesting aspect to look into this cash flow from investing activities is the column of proceeds from disposal of fixed assets, proceeds of disposal of business. If the figures are substantially high it can help in visualization of why the company is disposing of assets.
Related Articles –
Investor’s earlier use to look into income statement and balance sheet 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 conjunction of cash flow statements. This actually helps in getting the whole picture and also helps taking 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 about the core investing activity of the company.