Investing cash flow
- Adam Edwards
- Oct 20, 2024
- 2 min read
Updated: Jan 12
Investing cash flow is part of the cash flow statement. It is cash a company spends or receives from investments. This is usually in long-term assets, such as property, equipment, or securities. It shows how a company uses or generates cash through its investing activities.
It gives insight into how the company is investing in growth and long-term assets, and how it generates cash from selling assets or investments.
Common Cash Outflows
Purchase of Property, Plant, and Equipment (PPE). Cash spent to buy physical assets such as factories, offices, machinery, and equipment.
Acquisition of Businesses or Investments. Cash spent on acquiring other companies or equity stakes in other businesses.
Investment in Securities. Cash spent to buy stocks, bonds, or other investment securities.
Common Cash Inflows
Proceeds from Sale of Assets. Cash received from selling physical assets like property or equipment.
Proceeds from Sale of Investments. Cash received from selling investments such as: stocks, bonds, or interests in other businesses.
Divestiture of Business Units. Cash gained from selling parts of the company, like subsidiaries or divisions.
Example of Investing Cash Flow:
A company spent £100,000 on equipment and received £50,000 from selling old machinery. Its net cash flow from investing activities would be:
Net Investing Cash Flow = £50,000 − £100,000 = (£50,000)
Why is Investing Cash Flow Important?
Future Growth. It shows how much a company is investing in its future through capital expenditures. High investment can signal expansion or preparation for future growth. ---
Asset Management. It provides insight into how a company manages its assets. It highlights if it's selling off assets or acquiring new ones to enhance operations.---
Cash Allocation. It helps investors and analysts understand if a company is generating cash from divestments or spending on new investments.
Benefits of Investing Cash Flow.
Shows Capital Allocation. It helps understand where a company is spending its money to grow and improve its business.
Growth Indicator. High cash outflows for investments may indicate a focus on expansion and growth, which can be positive for long-term prospects.
Liquidity Indicator. Cash inflows from selling investments or assets can provide liquidity, supporting other business activities.
Drawbacks of Investing Cash Flow.
High Expenditures Can Lower Cash. Significant cash outflows for investments can reduce available cash for other activities, potentially leading to liquidity issues.
Doesn’t Reflect Immediate Profit. Investment in long-term assets may not result in immediate cash returns, so high investment spending may not show quick financial benefits.
One-Time Transactions. Large cash inflows from selling major assets could distort the company’s cash flow and may not indicate ongoing operations.