Revenue is an opinion, cash flow is a fact. The Cash Flow Statement is one of the most important statements in a 10-K. In this article, I’ll teach you how to analyze a Statement of Cash Flows in a few minutes.
CQ, I apologize for cutting in your conversation with Six Bravo. Could you write a piece about a mistake that you made in the past and what lesson did you learn from it! Thank you!
CQ, many thanks for another great and very informative article!
It was late last night, when I started going through it, but my tired eyes were soon closing, and I couldn't finish it. I finished reading it today after filling out the request form for the BRK meeting credentials. On this topic, are you planning on attending? It would be a great pleasure to shake your hand and buy you a drink as a small token of gratitude.
And I have one more question. Can you recommend a great book on analyzing financial statements. I own a few, but I find that they all give only the basics and lack a more sophisticated explanation of the income statement, balance sheet and cash flow statement.
That's lovely to hear. We'll compile these articles in a course very soon.
I am attending the Berkshire Meeting this year. Just send me an email or DM me via Twitter and we can try to meet each other.
Regarding the book... I would suggest to read Valuation: Measuring and Managing the Value of Companies. Regarding Quality Investing and financial statements, How To Pick Quality Shares is also a very good book.
Yea - its probably going to be the most important statement for investing in many emerging market stocks... If I recall back in the late 1990s when I was in university, there was a rule change or something and this was a fairly new statement or requirement for something?
I'm American 😀 "In 1992, the International Accounting Standards Board (IASB) issued International Accounting Standard 7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide cash flow statements." Must have been that... They were also changing CPA credit requirements to 150 or something in the late 1990s plus students from NY planning to go back there had to learn some specific stuff
I also did ended up doing an MBA in Australia - Ironically, my accounting professor there was American too. Maybe if you haven't already, do a series on the differences between British and American accounting... Sri Lanka gets British style accounting outsourcing while the PH gets American style...
There was also something with Australian accounting - maybe accounting for superannuation... Been so long...
Great read regarding Cash Flow and types of Cash Flow. As I was reading other articles pertaining FCF, have noticed that some companies use stock-based compensation(SBC) as expense in Income statement, especially to reach FCFE. According to Professor of Valuation Aswath Damodaran also teaches "that this real cost to shareholders should be reflected in a valuation model. He believes that SBC should NOT be added to Net Income in order to reach FCFE."
Not sure How many companies use SBC as expense in Income statement itself ?
For US stocks, SBCs are always included as a non-cash expense in the income statement. It's mandatory under US GAAP so you should always subtract them to calculate the free cash flow.
In Europe, companies also always treat it as an expense.
Nice work, CQ!
Thanks, Six Bravo!
What should we write about next week? :)
CQ, I apologize for cutting in your conversation with Six Bravo. Could you write a piece about a mistake that you made in the past and what lesson did you learn from it! Thank you!
That's a very good suggestion. I'll certainly write one about this topic in the future!
Thank you so much for having this content free, it’s greatly appreciated, im sure everyone reading agrees!
Thank you very much, Vinny!
CQ, many thanks for another great and very informative article!
It was late last night, when I started going through it, but my tired eyes were soon closing, and I couldn't finish it. I finished reading it today after filling out the request form for the BRK meeting credentials. On this topic, are you planning on attending? It would be a great pleasure to shake your hand and buy you a drink as a small token of gratitude.
And I have one more question. Can you recommend a great book on analyzing financial statements. I own a few, but I find that they all give only the basics and lack a more sophisticated explanation of the income statement, balance sheet and cash flow statement.
All my very best!
That's lovely to hear. We'll compile these articles in a course very soon.
I am attending the Berkshire Meeting this year. Just send me an email or DM me via Twitter and we can try to meet each other.
Regarding the book... I would suggest to read Valuation: Measuring and Managing the Value of Companies. Regarding Quality Investing and financial statements, How To Pick Quality Shares is also a very good book.
I remember it from accounting courses and it was the most difficult statement to get your head around sometimes... 😀
And I was afraid that this article might be a bit too complex. 😀Was this article written in an understandable manner?
Yea - its probably going to be the most important statement for investing in many emerging market stocks... If I recall back in the late 1990s when I was in university, there was a rule change or something and this was a fairly new statement or requirement for something?
It depends under which accounting standards the company falls so it might be that there was a big change in the late 1990s in the country you live in.
I agree with you that the CF Statement is the most important financial statement. :)
I'm American 😀 "In 1992, the International Accounting Standards Board (IASB) issued International Accounting Standard 7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide cash flow statements." Must have been that... They were also changing CPA credit requirements to 150 or something in the late 1990s plus students from NY planning to go back there had to learn some specific stuff
I also did ended up doing an MBA in Australia - Ironically, my accounting professor there was American too. Maybe if you haven't already, do a series on the differences between British and American accounting... Sri Lanka gets British style accounting outsourcing while the PH gets American style...
There was also something with Australian accounting - maybe accounting for superannuation... Been so long...
Love your content. Easy to digest. Well presented
Thank you, Martin. The best is yet to come!
Wow now that's enlightenment in simple way kudos
The honor is all mine, Atiq!
Always happy to help.
Great read regarding Cash Flow and types of Cash Flow. As I was reading other articles pertaining FCF, have noticed that some companies use stock-based compensation(SBC) as expense in Income statement, especially to reach FCFE. According to Professor of Valuation Aswath Damodaran also teaches "that this real cost to shareholders should be reflected in a valuation model. He believes that SBC should NOT be added to Net Income in order to reach FCFE."
Not sure How many companies use SBC as expense in Income statement itself ?
Many Thanks
Regards
Vikram
Hi Vikram,
Good question. SBCs are a real expense for shareholders. As Aswath correctly says, you should reflect this in your valuation.
What I usually do is that I calculate the FCF of the company and then subtract SBCs again.
That’s for getting back.
So when you subtract SBCs, even if there’s a mention of SBC in Income Statement as expense ?
PS: How do I address you, I mean I am not sure of your 1st name.
Thank you one again
Regards
Vikram
Hi Vikram,
For US stocks, SBCs are always included as a non-cash expense in the income statement. It's mandatory under US GAAP so you should always subtract them to calculate the free cash flow.
In Europe, companies also always treat it as an expense.
I am not sure how companies report it in Asia.
You can just call me QC if that's OK for you. :)
Bravo
Can you elaborate on the indirect vs direct method of showing the CFS?
Why do firms use different methods? How to compare them? Whats the difference from a modelling perspective and as an investor?
Hi Jack,
Very good questions. I'll devote an article to this in the future!
thanks!
It's an honor!