Cash flow statement

The statement that reconciles accounting profit to the movement in the bank balance, split into operating, investing and financing activity. It is the hardest of the three to dress up, because the closing cash figure has to agree with a bank confirmation.

Follow one year. A company reports ₹340 crore from operations, spends ₹210 crore on new plant, and repays ₹90 crore of debt. Cash rose by ₹40 crore. Profit could have been anything; this is what actually happened to the money.

The three sections answer three different questions. Operating asks whether the core business generates cash. Investing asks what the company is doing with it. Financing asks who funded the difference.

Reading the three signs together tells a story before any number is examined. Positive operating, negative investing and negative financing is a mature business funding its own growth and returning the rest, which is the healthiest pattern there is. Positive operating, heavily negative investing and positive financing is a company in expansion, borrowing to build, and whether that is good depends entirely on the returns the new capacity earns. Negative operating with positive financing is a business consuming cash and being funded by somebody else, which is survivable for a young company and terminal for an old one.

An analyst who reads only one statement should read this one.