Analyzing Financial Strength Using The Net Cash Flow Formula

There are a variety of calculations used to measure financial performance. The statement of cash flows provides a look into the financial strength of a company. The statement measures free cash flow which examines the ability for a company to enhance the value of their shareholders. These measurements are calculated using the net cash flow formula.

Statement of Cash Flows

There are three parts to the statement of cash flows which are needed to calculate the net cash flow formula correctly. The parts include the cash flow from financing, cash flow from investing and cash flow from operations. Companies operate their businesses within each of these measurements. Companies can sell equity or borrow money to finance their operations. These calculations would fall under cash flow from financing. Items that would fall under cash flow from investing would be when a business purchases assets. Assets include real estate, company cars or product inventory. The assets that are used to generate cash, pay taxes and interests fall under the cash flow from operations category.

Net Cash Flow Formula

The net cash flow formula is measured analyzing the three parts that make up the statement of cash flows. Cash flow from financing, plus cash flow from investing, plus cash flow from operations is the net cash flow formula. The formula is written as follows:

Net Cash Flow = CFF + CFI + CFO

When analyzing the financial strength of a company using the net cash flow formula, start with the yearly sales, minus the operating costs and depreciation. Next, add up the costs of the assets that are used within the company. This amount will be used as the cash flow from investing. Lastly, calculate the difference between the sales that are generated versus the inventory, interests and taxes that are paid. This figure is used as the cash flow from operations number.



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