Cash from investing activities is one of the sections of the cash flow statement, more
specifically the section right in the middle.
The cash flow statement explains how much cash has come in and how much cash has gone
out during a year, and what the sources and uses of this cash flow were.
Here's a high level cash flow statement example of one of the most-discussed companies in
the world, more specifically a company that is likely to play a major role in the future
of mobility.
They started the year with $4.3 billion in cash,
and ended the year with $6.8 billion in cash.
A net increase of $2.5 billion.
The cash flow statement explains where that increase came from, by providing a split into
the operating, investing, and financing categories.
These cash flow categories, as well as the details behind them, provide great insights
into the expansion plans of the company, and its ability to generate significant cash flow
from its operations.
A net $2.4 billion was generated from operating activities (a net cash inflow), $1.4 billion
was used in investing activities (a net cash outflow, hence the brackets to indicate a
negative number), and $1.5 billion provided by financing activities (a net cash inflow).
If you dive into the cash from investing activities section, you will find that the $1.4 billion
is nearly all related to capital expenditures (purchases of property and equipment).
That makes this “cash from investing activities” number very similar to the usual picture that
we see for most companies in most years.
Here are the cash from investing details for a large telecom company on the left: $17.6
billion total cash outflow in the category, with $17.9 billion of capital expenditures
making up pretty much the full category.
For this telecom company, the capital expenditures consist of tangible assets such as wireless
networks and high-speed fiber, as well as intangible assets such as capitalized software.
Most users of financial statements turn to the investing activities section of the cash
flow statement for exactly that CapEx number, as this is an important input to calculate
free cash flow.
Free cash flow is usually defined as cash from operating activities, minus capital expenditures.
Free Cash Flow is that part of the total cash flow
that is not required for operations or reinvestment.
A similar picture on cash from investing activities for one of the world’s largest retailers
on the right: out of $9.1 billion total cash outflow for investing activities, the $10.7
billion of payments for property and equipment is by far the single largest line item that
explains nearly all of total amount of the investing activities section
of the cash flow statement.
Take this CapEx number of $10.7 billion,
plug it into your free cash flow calculation, and off you go!
If you turn to the cash flow statement of any of the Big Tech companies, you will find
that a lot more tends to go on in the investing section.
First of all, the size of the total cash used in investing activities can be enormous: $24.2
billion for this specific company in one single year.
The purchases of property and equipment (cash outflows) and the proceeds from property and
equipment sales and incentives received from property and equipment vendors (cash inflows)
are the first two line items in this example.
Payments to acquire businesses is the next line item.
The last two line items are related to purchase and sale of marketable securities, the net
cash outflow of $9.1 billion for these two combined represent the company’s decision
to park part of the “excess cash” that is generated from operating activities into
marketable securities on the balance sheet.
So is cash from investing activities always a net cash outflow for a company?
Not necessarily!
This overview shows three years of the cash from investing activities section of a company.
It’s a company that once was one of the most valuable and most respected companies
in the world.
The overview shows that it is possible for investing activities to be providing cash
multiple years in a row, primarily due to receiving cash for the sale of businesses.
This company has been selling off operations for years, and used the proceeds primarily
to pay off debt (which is shown as a cash outflow
in the cash from financing activities section).
Obviously, this cannot go on forever,
as at some point you will run out of businesses to sell!
The cash flow statement does not provide you with any detail on whether a gain or a loss
was made on selling these businesses.
The cash flow statement deals with cash coming in and cash going out, while the income statement
will show any gain or loss versus book value of selling businesses (or property, plant
and equipment, for that matter).
The balance sheet will no longer show the assets and liabilities
of the businesses that were sold.
Buying or selling businesses can thus affect all of the three financial statements!
The definition of the cash from investing activities section of the cash flow statement
is: an overview of the cash used in, or provided by, the purchase or sale of fixed assets,
businesses, and/or (marketable) securities.