While the income statement shows profitability and the balance sheet presents assets and liabilities, the cash flow statement reveals the actual cash moving in and out of a business. A company can report a high Net profit on paper through accrual accounting, yet face severe liquidity shortages if customers delay payments. Understanding cash flows helps retail investors evaluate whether earnings are backed by real cash.
Cash flow reports are split into three core activities: operating, investing, and financing. Analyzing these sections together shows how a company generates cash, funds its capital projects, and manages its capital structure.
1. Operating Cash Flow
Operating cash flow measures the cash generated or used by a company's core business activities. It starts with net income and adjusts for non-cash expenses, such as depreciation, alongside changes in working capital like inventory and receivables.
A healthy company consistently generates positive operating cash flow that meets or exceeds its reported profitability. If operating cash flow is repeatedly lower than net profit, it may indicate uncollected customer debts or excess unsold inventory.
For example, Juhayna displays the following cash flow figures across recent fiscal years:
| Juhayna · Annual · EGP | 2020 | 2021 | 2022 | 2023 | 2024 |
|---|---|---|---|---|---|
| Operating cash flow | 983 million | 768 million | 440 million | 1.6 billion | 2.27 billion |
| Investing cash flow | -196 million | -200 million | -117 million | -649 million | -2.9 billion |
| Financing cash flow | -698 million | -298 million | -430 million | 12.53 million | 1.53 billion |
| Net change in cash | 88.48 million | 269 million | -107 million | 963 million | 902 million |
| Net profit | 428 million | 526 million | 638 million | 1.02 billion | 2.74 billion |
Comparing 1.6 billion EGP to 1.02 billion EGP shows how cash generated from day-to-day operations aligns with bottom-line accounting profits.
2. Investing Cash Flow
Investing cash flow tracks cash spent on or received from long-term assets. This includes purchases of property, plant, and equipment (capital expenditures), acquisition of subsidiaries, and investments in financial securities.
A negative investing cash flow is standard and often desirable for growing companies. It indicates that the firm is spending cash to purchase new equipment, expand factories, or upgrade infrastructure to generate future revenue. Conversely, a positive investing cash flow usually means the company is selling off assets or liquidating investments.
Consider telecom operator Telecom Egypt. Infrastructure maintenance and network expansion require continuous capital outlays. In FY 2023, Telecom Egypt reported operating cash flow of 16.94 billion EGP and investing cash flow of -23.91 billion EGP. The negative investing cash flow reflects significant continuous investment in its telecom infrastructure.
3. Financing Cash Flow
Financing cash flow records cash transactions with capital providers, including banks and equity shareholders. Key line items include:
- Proceeds from issuing debt or equity.
- Repayments of bank loans and debt principal.
- Dividends paid to shareholders.
A positive financing cash flow indicates the company raised funds by borrowing or issuing shares. A negative figure means the business repaid debt, repaid capital, or paid dividends.
In real estate and development, cash flows depend heavily on project construction cycles and borrowing. For instance, Orascom Development Egypt recorded operating cash flow of 1.28 billion EGP, investing cash flow of -1.67 billion EGP, and financing cash flow of 2.06 billion EGP. These figures illustrate how the company balances project investments and debt financing.
Cash Flow Patterns: Growth vs. Mature Companies
The pattern across the three cash flow sections reflects a company's stage of development:
- Growing Companies: Typically show high positive operating cash flow, highly negative investing cash flow (due to expansion), and variable financing cash flow depending on loan drawdowns or equity issues.
- Mature Companies: Generate substantial positive operating cash flow, moderate negative investing cash flow (mainly maintenance spend), and negative financing cash flow as they pay dividends or service debt.
- Distressed Companies: Often report negative operating cash flow, positive investing cash flow from selling assets to cover operational costs, and unpredictable financing cash flow.
What to Look For
When reviewing a cash flow statement on AskBorsa Academy, focus on these fundamental indicators:
- Operating Cash vs. Net Profit: Confirm that operating cash flow is consistently positive and tracks net profit trends over time.
- Capital Expenditure Trends: Evaluate whether negative investing cash flow represents productive long-term expansion rather than inefficient spending.
- Dividend and Debt Sustainability: Ensure dividend distributions and debt service payments are funded primarily by operating cash flow rather than additional borrowing.
- Total Cash Movement: Review the Net change in cash to verify the net movement in the company's cash balance at period end.
