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Why the Statement of Cash Flows Matters

09/21/07 - 12:08 PM EDT

Scott Rothbort

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.
At the time of publication, Rothbort was long BAC and MCD, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.


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