Cash Flow Statements

Joan Dickinson: Well, I don't understand. If you're studying to be a lawyer why that kind of of job? Toughening up the muscles for the football field?
Anthony Judson Lawrence: No.
Joan Dickinson: There must be some reason. 
Anthony Judson Lawrence: Hh-hhm.
Joan Dickinson: Well, give me a hint.
Anthony Judson Lawrence: Alright, it begins with a 'K.'
Joan Dickinson: Kick the can.
Anthony Judson Lawrence: No. Kold cash.
--The Young Philadelphians

Last time we reviewed income statements--the first of the financial statement trilogy. Today we'll take a look at cash flow statements.

It is often said that cash is the lifeblood of business. Because of vagaries in accounting procedure, it is quite possible for companies to report large profits on their income statements while being cash poor (why this is so is a topic for another day). The cash flow statement basically strips out expenses and accounting adjustments to provide a better sense of the cash economics of a business.

The essential metric to determine here is called 'free cash flow.' Free cash flow (FCF) represents the cash that is left over after a company pays for operating expenses and capital projects. It is calculated by taking operating cash flow (OCF) and subtracting capital expenditures (CapEx). Using the symbology:

FCF = OCF - CapEx

Let's stick with our Intel (INTC) example from last time. Referencing Intel's cash flow statement at the end of fiscal year 2018, observe that the company reported OCF of $29.4 billion and CapEx of $15.2 billion. INTC's free cash flow, then, amounts to $29.4 - $15.2 = $14.2 billion. That's good sized free cash flow.

I also like to look for trends in free cash flow. Ideally, FCF should be increasing over time. We can see that has been the case with Intel. The company's FCF has grown from about $12 billion in 2015 to about $14 billion in 2018.

Sizable and growing free cash flow. Those are signs of a business with strong cash economics--capable of supporting future business (and dividend) growth.

That's what we can learn from quick review of cash flow statements. Next time we'll examine the last of the financial statement trilogy: balance sheets.

position in INTC