Cash flow is the net amount of cash or cash equivalents being transferred into and out of a company.


Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, pay expenses, and pay shareholders a dividend.


Cash flow is reported on the cash flow statement which details activities from three sections:


  • Operating activities
  • Investing activities
  • Financing activities


Cash flow is a key indicator of a company's financial health, along with profitability and shareholders' equity. This is the final link in the triad: the Profit and Loss Statement, the Balance Sheet and the Cash Flow Forecast. If one of the three is not done, the reliability of the other two is in question.


This is now the 'hot metric' in measures to watch.


Free cash flow is simply calculated by taking the net cash the company produces through its operations and subtracting any outlays of cash for investment in fixed assets such as property, plant and equipment. In other words, free cash flow is the cash left over after a company has paid its operating expenses and capital expenditure.


Free cash flow shows how effectively a company generates and uses its cash.


If the company's free cash flow is healthy and increasing, you know at least that:


  • The company has options. It can use free cash flow to pay down debts, buy a competitor or pay dividends to owners and shareholders.
  • Managers can focus on the business, not on raising additional funds.
  • Investors are likely to look favourably on the company's operations.


Source: Financial Intelligence, Berman & Knight; Investopedia, September 2018.