A cash flow statement consists of three categories: operating, investing and financing activities. In this piece, we will focus on investing activities.
What is Cash Flow from Investing Activities?
A company lists any investments made with cash on its cash flow statement. This section represents the amount of cash used or generated from investment-related activities in a specific period.
Items reported on a cash flow statement for investing activities include purchases of long-term assets such as property, plant and equipment (PP&E), investments in marketable securities such as stocks and bonds, as well as acquisitions of other businesses.
Other items to include are a sale of a division, proceeds from the sale of PP&E, and proceeds from the sale of marketable securities and other businesses.
Some companies will have items not mentioned above, so it’s important to look at the balance sheet of a company to determine the line items.
Cash Flow from Investing Activities =
(Purchase)/Sale of Long-Term Assets (Capex)
+ (Purchase)/Sale of Other Businesses (M&A)
+ (Purchase)/Sale of Marketable Securities
Company XYZ had the following transactions for year-ending 2017:
|Purchased a crane||500.0|
|Sold a manufacturing machine||20.0|
|Purchased a division of another company||2,000.0|
|Sold marketable securities||30.0|
|Purchased marketable securities||10.0|
The above example would reflect in the investing activities of a cash flow statement as:
|Purchases of Property and Equipment||(500.0)|
|Proceeds from property and equipment incentives||(20.)|
|Acquisitions, net of cash acquired, and other||(2,000.0)|
|Sales and maturities of marketable securities||30.0|
|Purchases of marketable securities||(10.0)|
|Net cash provided by (used in) in investing activities||(2,460.0)|
Points to Note
- Purchases of the crane, a division of another company and marketable securities are an outflow of cash.
- Sales of the manufacturing machine and marketable securities is an inflow of cash.
What Not to Include in Investing Activities
- Debt, equity or other forms of financing.
- Interest payments or dividends.
- Income or expenses related to regular business operations.
- Depreciation and amortization expenses on non-current assets.
Why is Cash Flow from Investing Activities Important?
Although a company may report a negative cash flow in investing activities, it doesn’t necessarily mean that it’s going to have a negative impact on the business.
In the short-term, the company has faced a negative impact on cash flow due to the purchase of property, plant and equipment, but in the long-term the assets could help generate growth in a company’s revenue.
In summary, investing activities provide an insight into how effectively the company is keeping its asset base up to date, and investing for future growth.