Getting Started: The Statement of Cash Flows

When you look at the statement of cash flows, ask yourself: "Does this company need cash?" A favorable operating cash-flow ratio and a decent proportion of investment-related financing are good signs.

The operating cash flow ratio measures how well cash covers current obligations. To calculate this ratio, divide cash flows from operations by current liabilities . With this ratio, a bigger number typically means a better business outlook.

Ideally, financing is mainly used for the purposes of investing in the company, not for operations. One way to check is by comparing the cash from financing with the cash used on investing activities. If these numbers are pretty close to each other, things look good. If these numbers are not close, I would want to know where the rest of that financing was going before I put my investment money in.

Despite not being as well known as the other financial statements, the statement of cash flows can be another effective way for you to measure a company's pulse and overall health ("Getting Started: Fundamental Analysis").

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