27. How to read a cash flow statement Video Lecture | Become an Expert: Value Investing - Business Basics

welcome to course to unified lesson 3
cash flow statement examples in this
lesson we're going to use four different
companies to demonstrate what a cash
flow statement looks like and how it
might be used so let's get started ok on
the left hand side of the screen I'm
going to leave up the slide from the
very last lesson that we just did just
to remind you that the operating
activities are what we're looking to be
in the green and the investing and
financing activities on the cash flow
statement is what we want to see in the
red so let's go ahead and pull up a good
example of a cash flow statement and I'm
going to pull up Walmart in order to
demonstrate that so the ticker for
Walmart and I'm just so you know I'm on
MSN money and I'm pulling up Walmart
which is the ticker for that is WMT and
I'm gonna hit enter and you can see it
brings up the all the different
information for a Walmart now remember
all this information all these numbers
that you're seeing generated onto this
page are all extracted from the income
statement the balance sheet and the cash
flow statement
so those three documents are providing
all this information so in order to go
to the cash flow statement we're going
to come down to the bottom under the
financials where you see the income
statement the balance sheet and the cash
flow statement listed so we're going to
go ahead and click on the cash flow
statement and as the cash flow statement
comes up you'll see that you have the
option to look at the annual cash flow
statement or the interim cash flow
statement and all you got to do is just
click that button right there and it
will take you between the two this one
goes by quarter so every three months
this is the information if you just want
to look at the annual which is every
year you click on the annual and that's
what we're just going to use to
generically look at this cash flow
statement so when you look at the
statement it has a whole lot more
numbers than what I demonstrated it over
here on the left-hand side of the screen
but the premise of this sheet is exactly
the same as you look at the first bold
line of information you'll see it says
cash from operating activity so that's
our operating activity line so as we
look at this we can see that the numbers
are fairly profound for Walmart and
these numbers are in millions so that's
twenty billion twenty point six billion
dollars the next year is 23 point 1
billion
and up to two thousand twelve is twenty
four point two billion okay so that's
all the money that's flowing into
Walmart that's how much they're
generating per year.if for their
operating activities now as we look down
to the next bold line which is cash from
investing activities this is where we
want to see the negative numbers because
this is where Walmart is taking that
money and they're either investing in
more supplies they're investing in more
stores they're investing in it maybe in
other businesses but that's that's what
this number represents so when we look
at the 2008 number where they generated
twenty point six billion dollars we then
go down to the next segment here which
is the investing activities we can see
that Walmart invested 15.6 billion of
that twenty twenty point six billion
dollars so that's a substantial portion
of that money is being put directly back
into the business as investing now as we
look into 2012 we can see that they
generated twenty four point two billion
and they invested sixteen point six
billion dollars right here okay so the
last line is their financing activities
so let's look at what Walmart was doing
in the finance department here so when
we go down here you can see where it
says cash from financing activities so
let's go look at the 2008 number Walmart
was paying off seven point four billion
dollars so let's see how they were doing
that now this is where you can drill
down and look at the individual lines
that make up that financing activity so
three point five billion dollars of that
financing activity went to paying
dividends KCl says total cash dividends
pay since that's a negative number
that's the money flowing out of the
business to the shareholders and the
shareholders received three point five
billion dollars in dividend payments the
next number is the retirement of stock
that's issuance or retirement of stock
when you see a negative number that
means Walmart is buying back their share
they're not issuing them they're buying
them back so that's a really good thing
as a shareholder if you're holding
shares of this company
Walmart's buying back shares making your
the shares that you're holding more
valuable okay so seven point six billion
dollars was spent by Walmart buying back
their own shares which is a great thing
if you're a shareholder so and you can
see that those trends continued through
the next five years when you look at
that financing activity it was always a
negative number
throughout all five years so when you
look at the net change in cash you can
see that it changed by negative two
billion dollars here positive one point
seven positive 0.6 negative 0.5 and
negative 0.8 when you look down here at
the bottom of the cash flow statement
now this isn't something that I taught
in the previous lesson but when you look
down here at the at the bottom of the
cash flow statement it shows you what
the cash the total cash was at the
beginning and the end of that term so
you can see that Walmart has been
sitting on five point five billion
dollars in cash seven point two seven
point nine seven point three and six
point five so generally Walmart's been
keeping about seven billion dollars in
cash in hand so that they have that for
the rainy day fund or for the for them
to be able to acquire another company or
whatever they plan on using that money
for it's kind of like you having money
in a checking account that you can use
for that rainy day or if you would need
it for emergency money and that's what
that is for Walmart so this is a very
strong cash flow statement now whether
we're going to actually invest in a
company like this you'd have to go in
and dig to the income statement in the
balance sheet and figure out how much
their their equity has been growing and
all those things that we learn from unit
three of course - that's that's how you
would assess what this company's worth
what I'm showing you here what the cash
flow statement is to show you the health
of the company whether it's trending in
the right direction and for this company
it's absolutely trending in the right
direction and they're showing all
positive signs so I just showed you a
great
looking cash flow statement so let me
pull up one that doesn't look nearly as
good and to demonstrate that I'm going
to use Sears Sears Holding Company so
they're ticker is SH LD will hit enter
and just like that Walmart we're going
to go down on the Sears Holding Company
okay and we're going to click on the
cash flow statement okay and we'll just
look at the annual cash flow statement
we're going to do the the next three
kind of fast because I spent so much
time on the Walmart one so as we look at
this cash flow statement we'll start off
by looking at the operating activities
this is where we need to see the really
strong positive number in growth so when
we look at 2008 it was 1.5 billion then
it was 0.9 then 1.5 then it was point 1
billion and then in 2012 it's actually a
negative number so the trend on that
operating activities is is horrible
that's the exact opposite of how you
want to see a company trending now when
we go down to the cash for the investing
activities you'll see that it's negative
0.4 negative six point I'm sorry
negative point six negative point one
negative point 4 negative point three
you can see that it's it's kind of
remain neutral and they've been
investing in pretty much the same thing
which is probably their inventory and so
that's you know that's a fairly standard
number now when we go down to the
financing activity you'll see that back
in 2008 they were paying off a lot of
they were actually buying a lot of stock
back in 2008 and then that slowly
started the decline and they're actually
incurring debt at this point there's
there's 1 billion dollars a debt there's
point point 3 billion dollars of debt
that they're taking on ok so you can see
that that number is trending in the
wrong direction so when we look at Sears
you can see that this this is a company
that's probably going through some
difficult times right now I'm sure if we
look at the balance sheet in the income
statement we see very similar things but
based off this cash flow statement this
is not
something that you would really want to
actively look at so let's go ahead and
look at another good company let's go
ahead and pull up Intel it's IMTC
and when we pull up Intel we'll go down
to the bottom and look at the cash flow
statement and you can see looking at the
operating activities
it goes from twelve billion ten eleven
sixteen twenty billion that's nice
positive growth on the operating
activities when we go down and look at
the investing activities it's negative 9
negative five negative seven negative 10
negative 10 so here's a real consistent
investing activity within Intel they're
using a lot of that capital that they're
producing to invest back in the business
and also buying other types of assets
and then when we look at the financing
activity it is it is growing
tremendously in the fact that they are
buying back all kinds of shares when we
look here at the 2011 numbers you can
see that they bought back twelve billion
dollars worth of their shares and that's
a great thing as a shareholder for the
company to be buying back that many
shares I would personally prefer
dividends but this is another method for
them to put more money in your pocket so
let's go ahead and pull up the the last
company which has a bad cash flow
statement and that's going to be Kodak
so the ticker for Kodak is ek dkq and
it's actually Eastman Kodak so we'll go
ahead and pull that up and as I'm sure
you've probably heard codecs going
through some really rough times are
going to be filing for bankruptcy here
shortly so this will be a example of a
really poor cash flow statement so let's
go ahead and click on cash flow and as
we look at the numbers here you can see
that they're all trending on the
operational activities in a negative
direction this is not what you want to
find whenever you're looking at a
business on the investing activities are
completely fizzling out um you can see
that they sold a lot of their assets
here in 2007 and the following year you
can see how the net income went negative
right there
so you could have known something was up
right there on the 2007 whenever they
started selling all their assets that
was that's a real good sign right there
things were going sour back in 2007 then
we go down the financing activities you
can see that the the positive number
here is really bad because that means
they're just taking on a bunch of debt