Examples of Cash Flow Statements and Analysis

Applying cash flow patterns introduced in cash flow analysis to specific company examples tells the story of the company’s financial strength and even its life cycle. Unusual Pattern, cash inflows not sustainableCompany is generating cash, but also selling assets to cover debt or purchase shares of its own stock.Company is in decline or restructuring.Company is generating cash, but debt or stock issuance is required for additional funding. Compare Google and MGM MirageCompanies in late part of growth stage.Strong cash flow pattern that generates enough cash from operations to fund capital investments, and repay debt or buy back stock.Company growing moderately, or successful, mature company: Wal-Mart, Macy’s, Nordstrom, Home Depot.Company does not generate enough cash to fund operations or capital expansion. New debt or stock is issued to cover current and long-term obligations.Typical of young start-up companies getting cash from finance (CFFF +) as in the example company Sunny Sunglasses Shop. Also indicative of mature company with negative cash flow from operations taking on debt to cover capital requirements (Goodyear).Unusual pattern only possible with cash reserves, unsustainable.Unusual pattern where a company does not generate sufficient cash from operations, but also funds operations by selling assets while obtaining loans or issuing stock.Late stage of company, end of life cycle, or restructuring.Long-term assets are sold to fund operations and pay off debt.

Over time, companies have shown various patterns of cash flow that have been linked by research to company life cycle phases.

When reviewing the cash flow patterns, one year is not particularly significant in determining a company’s financial performance. The pattern should be checked for consistency over time, and whether or not the trends in each section are up or down. The following examples of cash flow statements take into account the trend for each section of the cash flow statement over time.

For example, the trend for Blockbuster has been a decrease of net cash inflows from operating activities from 417 million in 2004 to 51 million in 2008. Less cash to work with means less cash for growth, and less cash to pay debts. Recently Blockbuster has gone from a Pattern #4 to a Pattern #3, showing positive cash flow but not enough to fund its investments, thus relying more on debt CFFF(+).

Google generates so much cash from operations that it does not need a lot of financing activity. It has issued stock the past few years (CFFF+) to finance its operations and capital expenditures. Capital investments (CFFI-) have gone from $1.9 billion in 2004 to $5.3 billion in 2008, with stock issuance (CFFF+) going down from $1.2 in 2004 billion to zero in 2008. How has Google financed these investments? Google has gone from $977 net cash inflows for CFFO in 2004 to $7.8 billion in 2008, investing in capital expenditures with its cash arsenal from operations. With no debt to pay off and no dividends paid, it is at a competitive advantage of not needing debt and additional financing.

In fact, its recent activity from financing activities is not significant. Since Google does not need to pay off debt or issue stock, its cash from financing activities is slightly positive and immaterial in 2008. Perhaps the only factor that could turn its pattern to four with significant CFFF (-) activity is issuing dividends to shareholders, or buying back its own stock, which would reward stockholders with higher earnings per share.

Compare this scenario with MGM Mirage, where net cash inflows have decreased since 2006 and net cash inflows from financing activities (CFFF +) are a result of issuing more debt to finance capital expenditures (CFFI -). So it is important to note that each section should have a significant amount of activity to fit the pattern, and even if two companies show a similar cash flow pattern above in a cash flow statement analysis, net cash inflows for CFFO may be trending up for one, and down for another, in which case several years should be reviewed in the cash flow statement analysis. Typically, a pattern 3 signals money from operations but not enough to fund investment, as is the case with MGM Mirage where more borrowing or other forms of financing are required to support cash outflows for investing activities (CFFI-).

Pattern #1 is an extraordinary pattern in cash flow statement analysis that can only be maintained temporarily. Similarly, and directly opposite of pattern #1, pattern #6 is an extraordinarily negative pattern that can only be maintained temporarily with internal cash reserves. Both patterns are unsustainable over a longer period of time.

Pattern #4 indicates that a company has enough positive cash flow from operations to fund operations, fund capital investments, and pay down debt, issue dividends, or repurchase its own stock.

This is a very healthy company typically at a mature stage of growth, or growing moderately.

If a seasoned company shows a pattern of #5, it would not be a positive signal since it is showing net cash outflows from operations. Goodyear’s trend for cash from operations has gone from $787 million in 2004, steadily down over the years, recently entering a pattern #5, reporting negative cash flow from operations of $745 million.

For a small start-up, net cash outflows from operations are common. Net cash inflows from financing signals that investors are optimistic and are investing in the company, and the company is setting the stage for future growth by using funds invested (CFFF+) to purchase assets (CFFI-). Sunny Sunglasses Shop, our young example start up company, shows this pattern in the sample cash flow statement as it prepares for future growth.

Pattern #8 is the worst pattern for cash flow statement analysis. This pattern should signal a warning that the company is in financial distress. The company is not only not generating a positive cash flow from operations, but is not getting financed either. In fact, it is disbursing funds to lenders. But if the company is not generating cash from operations, where is the money coming from to pay investors? It can only come from selling assets, usually at a steep discount, which means the company is essentially not sustaining future growth, and ridding itself of its current assets at discounted prices (CFFI). It is a sign that a company is in financial distress and in need of quick cash. This is an unsustainable pattern that may lead to liquidation.