Why the Statement of Cash Flows Matters

4. Financing activities. Companies will issue debt or stock to raise cash. This will be a source of funds. Debt retirement and stock repurchases will be a reduction to cash. Other capital transactions such as hedges or swaps may also be accounted for in this section. Furthermore, the payment of dividends will be reflected in this section.

For example, Polo Ralph Lauren paid out $25.4 million in dividends and repurchased $179.9 million of stock as part of its plan to return value to shareholders. In order to fund recent acquisitions of its partnership share in certain joint ventures, Polo Ralph Lauren borrowed $80.8 million.

How to Interpret the Statement of Cash Flows

From the statement of cash flows you can ascertain the following information:

• The extent to which the company's operations -- both current and past -- have contributed to cash flow. It is not only important for a company to earn economic value for its shareholders -- it must convert that to cash or hard assets.
• How much the company is investing in its own business by way of capex or to expand its business through strategic acquisitions and investments. Polo Ralph Lauren has managed to not only earn money from operations; it converted prior earnings to cash and then used that for future investment in operations.
• The extent to which the company has been successful in returning value to shareholders or has had to tap the capital markets in order to fund its operations and investing activities.