Importance of Cash Flow Statements in Stock Picking

With this article, we can perceive cash flow statements as one the most important statements for stock picking as we get a valuable measure of strength, profitability and the long-term future outlook of a company. Bhavya Rathod sheds light on how investors can gain a clear picture of how much cash a company generates and gain a solid understanding of the company's financial well-being.

- Bhavya Rathod

“Revenue is vanity, profit is sanity, but cash is king”. This common consensus was used by former Volvo CEO Pehr Gyllenhammar in 1988 while discussing the global stock market crash of 1987. During that time, companies with ample cash reserves weathered the markets better than those who had poor cash management. When evaluating stocks, we can employ a number of relevant metrics. However, one of the most effective measures is also one of the most frequently overlooked. Cash flow statement is an excellent indicator of a company’s financial health. Since it is the ultimate measure of how the business is doing, cash flow statement is an important indicator for investors when determining whether the company is making or losing money.

The cash flow statement summarises a company’s cash receipts and cash payments over an accounting period. The cash-based information provided by the cash flow statement contrasts with the income statement’s accrual-based information. The income statement, for example, reflects revenues when they are earned rather than when they are collected. In contrast, the cash flow statement reflects cash receipts when they are collected rather than when the revenue was earned. A reconciliation of reported income and cash flows from operating activities provides useful information about when, whether and how a company generates cash from its operations.