Okay so the third financial statement to Analyze is the cash flow statement now The cash flow statement is another Important document to analyze and the Three documents i study are the balance Sheet which we covered the income Statement we just talked about and now We're going to talk about the cash flow Statement and later we are going to Discuss the quarterly earnings report And the quarterly earnings documents Provides an update on all three of these Financial statements so it's going to Update the balance sheet the income Statement and the cash flow statement so Basically once you understand these Three documents you will be able to Interpret the quarterly earnings report So we're basically building All three of these blocks and you're Going to be able to then Just take a look at that quarterly Earnings report and track the overall Progress to get an idea of the financial Health of that company and whether They're continuing on the same track So this financial document shows how Changes in the balance sheet have Affected cash and cash equivalents So essentially this illustrates the Amount of cash and cash equivalents Entering and leaving a company this is The money going in and then the money Going out so your personal cash flow
Statement which is again something you Guys should look at would be what you Earn each month versus what you are Spending each month so that's the same Thing we're doing but just for a company This time And this statement shows you where money Is coming from and how much money is Being spent And essentially this is going to give You an idea of how the company is Operating and if they have healthy cash Management Obviously if the company is spending all The money they're earning or spending More money than they're earning think About what that would mean for your own Life if you were in a situation where You were spending what you were earning You would be paycheck to paycheck and if You were spending more than you were Earning you would be going into debt so These are not things you want to be Seeing from the cash flow statement of a Company so what separates the cash flow Statement from the other income Statements is that it does not include Future operations on credit the balance Sheet and the income statement include Both cash sales and sales made on credit While the cash flow statement only Includes the cash sales so any sales Made on credit that are going to be paid In the future are not included in this
Cash flow statement so essentially cash Enters and leaves a company through Three different avenues and those Avenues are operations investing and Financing And these three avenues make up the cash Flow statement of a company so we're Going to break down each of these three Avenues now first of all we have Operations so a company generates cash From the products or services they offer Known as the operations this is the Goods and services they provide The positive or negative cash flow of These operations is a result of the cash Coming in and the cash going out related To these operations related to the goods And services they are selling now Operations includes the cash the Accounts receivable depreciation Inventory and the accounts payable now It's important to remember that not all Transactions involve cash items Oftentimes they involve credit so these Are excluded from the cash flow Statement the only items listed on the Cash flow statement are items that are Involved in a cash transaction not a Credit transaction and then we have the Investing avenue so this includes cash Flow from investing activities the Investing section of the cash flow Statement indicates any gains or losses As a result of company investments and
These could be capital assets like Equipment or buildings but this could Also include investments In securities or business acquisitions So if they're doing something with the Cash they are holding such as investing It to earn a rate of interest however Typically under the investing section These will be losses as a result of Capital expenditures associated with These investments so one of the biggest Examples is depreciation of the Equipment and the buildings that they Own and then we have the financing Avenue of the cash flow statement so This section includes any changes in Debt loans or dividends when capital is Raised through the issuing of corporate Bonds for example this is a cash inflow And then when capital is spent through The payment of dividends to shareholders For example this would be considered a Cash outflow and both of these would be Indicated under the financing section of The cash flow statement so this is where You're going to find out how much is Being borrowed and how much is being Repaid under the financing section of The cash flow statement So let's go ahead and take a look at the Cash flow statement for google and the First avenue being the operating cash Flow so this is what it's actually going To look like on top we're looking at the
Last five years and then the five year Trend of the net operating cash flow for Google and there's a lot that goes into This document i don't really go that in Depth with it i look at two figures here Those are the net operating cash flow Growth and then the net operating cash Flow to sales ratio so under the Operation section of the cash flow Statement the most important thing to Analyze is the net operating cash flow So what you're looking for is steady and Consistent growth of net operating cash Flow this is very important especially When double digit growth is seen year After year so as we can look at here With google um for the last five years We're seeing consistent double-digit Growth of the net operating cash flow so We see 12.28 percent and then 19.92 that You're following 16.3 percent and then In 2016 almost 40 percent growth in net Operating cash flow and as you can see There the five year trend is trending Upwards so this is fantastic this is Great numbers that you're going to be Looking for as far as the net operating Cash flow growth goes Again like we said you want to see Double digit growth and we are well into The double digits here especially into Uh 2014 and 2016. now the other thing i Look at is the net operating cash flow To sales ratio because this indicates
The ability a company has to turn sales Into cash and the higher the percentage Is the better because What is the good of sales what is the Point of having good sales if those Sales aren't being converted into cash You want to see a healthy amount of cash Being generated from the sales that they Have going on So again what we're looking for with Both of these here is consistency you Want to see consistency so if the Figures were to change out of nowhere That would be a red flag if all of a Sudden they had a 30 Operating cash flow to sales ratio and It fell to 10 percent that means that The sales are not being converted into Cash and you need to analyze why that May be so just to recap what you're Looking for here is double digit growth In the net operating cash flow and then You want to see a double digit Percentage when it comes to the cash Flow as far as how it's being converted Into sales the net operating cash flow To sales ratio so this is what i pay Attention to Under the operations section of the cash Flow statement And next we have the financing section Of the cash flow statement and i also Included investing activities under the Investing section of the cash flow
Statement because that's really the only Thing i pay attention to Under that section the most important Metric to look at under the financing Section of the cash flow statement is The free cash flow so what this is is The net operating cash flow after the Capital expenditures which are outlined In the investing section of the cash Flow statement so that's what i look for Under the investing section of the cash Flow statement is those capital Expenditures So if you take the net operating cash Flow and subtract these capital Expenditures that is going to give you The figure known as the free cash flow Which is one of the most important Figures to look at under the cash flow Statement and again as i'm sure you guys Have guessed what we're looking for is Steady and increasing free cash flow and We are definitely seeing that with Google here as you can see in the last Three years their free cash flow has Increased significantly uh 41 from 2014 To 2015 and then 60 from 2015 to 2016. So they have excellent free cash flow Which is something you want to see so Just to recap these are the things that We are looking for under the cash flow Statement number one how much cash is Entering and leaving number two are Operations resulting in consistent
Growing positive cash flow number three Are capital expenditures growing faster Than cash flow from operations Number four is the net operating cash Flow to sales ratio showing double digit Growth Number five is free cash flow growing at A consistent rate and number six is the Company cash cow and we can say with Confidence at this point after analyzing The three financial documents that Google is a cash cow and that is a great Thing to see in a long-term investment Is a company that has a lot of cash So really this is the big picture you're Using these three financial documents to Determine the financial health of the Company the debt versus the assets they Own and essentially how cash is entering And leaving and this all shapes up to Give you an idea of the financial health Of a company
