CFDs are complex financial instruments and carry a high level of risk due to leverage. A significant proportion of retail investors incur losses when trading leveraged products such as CFDs. You should carefully consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your capital.
Cash flow (also written cash flow) measures how much cash flows into and out of a company over a given period. Unlike net income, which includes accounting entries without an actual movement of money, this metric shows the business’s actual liquidity.
Cash flow in Spanish is known as flujo de caja or flujo de tesorería. Regardless of the name, it measures the same thing: the actual money the company generates and spends. A company can report profits and still have liquidity problems if its cash flow is negative.
Cash flows are classified according to the activity that generates them. Each type reveals a different aspect of financial health.
Operating cash flow reflects the cash generated by the business’s core activity: sales, collections from customers, payments to suppliers, and salaries. It is the most important because it shows whether the business generates actual cash through its day-to-day operations.
Investing cash flow records purchases and sales of long-term assets (machinery, real estate, acquisitions). Financial cash flow covers loans, stock issuances, and dividend payments. Both complement the operating cash flow to provide a complete picture.
If you’re wondering what a company’s cash flow is and how to calculate it, the process starts with the income statement.
Take the net income. This is the starting point. For example, 500,000 USD.
Add depreciation and amortization. These are not actual cash outflows, just accounting entries. For example, 80,000 USD.
Add provisions. Reserves for contingencies without actual disbursement. For example, 20,000 USD.
Result. The basic cash flow is 600,000 USD (500,000 + 80,000 + 20,000).
This simplified calculation shows how much actual cash the company generated, regardless of accounting adjustments.
Company A reports net income of 200,000 USD and operating cash flow of 350,000 USD. It generates more cash than it reports as profit. Company B reports income of 300,000 USD, but cash flow of $150,000. Its profits include accounting adjustments that do not translate into actual cash. For an investor, Company A is in better liquidity health despite lower profits.
Many beginners ignore cash flow and focus solely on profits. These misconceptions are common.
Equating net income with available cash.
Ignoring operating cash flow when analyzing a company.
Failing to verify whether profits translate into cash.
A profitable company can go bankrupt if it does not generate enough cash to pay its short-term obligations.
Analyzing cash flow provides information that net income does not.
Identifying companies with real liquidity versus those with inflated profits.
Assessing the ability to pay debts and dividends.
Comparing the quality of earnings across companies.
Cash flow shows the actual cash a company generates and spends. It is divided into operating, investing, and financing cash flows. For an investor, the data distinguish real earnings from accounting adjustments and reveal whether the company can sustain its operations and meet its obligations.