How to Master Analyzing the Cash Flow Statement by Vishal Khandelwal, Safal Niveshak
A wise man once said, “If your outgo exceeds your inflow, then your upkeep will be your downfall.”
That says a lot about the importance of cash flow in a person’s life. In fact, if your cash flow is healthy, it will cover a lot of sins.
A company is no different. You will find businesses that generate a lot of cash flows, even when they may not be earning profits.
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The following letter from Irving Kahn appeared in the June 25, 1962, issue of Barron’s. Irving Kahn wrote to Barron's criticising the publication’s comparison of the 1962 market crash to that of 1929. Irving Kahn points out that based on volume and trading data, the 1962 decline was a drop in the ocean compared to Read More
I have a friend who runs a company that did not make profit for five years in a row. But my friend never missed his yearly trip to the US, and he bought a high end car every two years. His employees were also paid well.
You may wonder, “But how he did it?”
The answer is – Great cash flow.
He was absolutely brilliant at timing income with outflow. When one product was selling great, he’d move the cash into product development. When nothing was happening, he’d slow down for a while and cut back on expenses.
He also had a smart accountant who knew how to spread losses around, as well as a few other tricks – all legal – for reducing the profit.
Now, if his company was listed, I may not have invested in it given the charismatic nature of the promoter, and high levels of uncertainty in his business and cash flows. A lot of listed companies are in fact like that – who cover up their sins by occasionally managing their cash flows well.
But a business that sustains a good positive cash flow performance year after year without manipulating expenses and profits is what you as an investor must look out for.
Now the problem that you may face is fundamental – how to assess whether a company has a good cash flow performance or not? This may be because you may not know how to analyze a company’s cash flow statement.
Not anymore! Here’s a video I’ve prepared for my Mastermind Value Investing Course, where I explain the working of a company’s cash flow statement.
For starters, a cash flow statement shows where the company’s cash came from (sources of cash) and where it went (uses of cash) during a given period (mostly a year).
Now please watch this video. I’ve tried to be as simple in my explanation as possible, so I believe you may find some value in what you see.
If you can’t view the video above, click here. Please don’t forget to turn on your speakers.
Let me know if you found the cash flow analysis easy (or difficult).
Post your feedback or any question you have in the Comments section below. I’m all ears.
P.S. Many tribe members have asked me how they can download the videos and see them at ease. Well, you can do this through Freemake Video Downloader, which you can download for free on your PC.