In the previous post I shared with you simple cash flow analysis with 3 of the most common ways to interpret the cash flow statement. Now I’m going to show you a line-by-line cash flow statement example of Johnson and Johnson (Ticker: JNJ).
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
Each are pretty self-explanatory, but I’ll go through them real quick just in case.
Operating activities have to do with the day-to-day operations of the business. Usually these take up the brunt majority of cash flow, as it is the centerpiece of the business. If the net cash numbers for operating activities are negative, it is not a good sign.
Next is investing activities. Yes, if you didn’t know already, companies invest in stocks and bonds just like individual investors do. It’s one of the reasons why we see so many people get affected by a stock market crash. The net cash numbers for investing activities can be negative or positive depending on the company, and transactions concerning the balance sheet are usually found here.
Finally you have financing activities. Again, this number can be positive or negative depending on how management is utilizing their capital. Here you will see transactions relating to debt, both the paying off of and acquiring, as well as other expenses such as dividends and share repurchases.
I’ll include pictures of the Johnson and Johnson annual report so that you can follow along.
–Net earnings: This is the same net earnings number from the income statement. Just straight up profit.
–Depreciation and amortization of property and intangibles: Depreciation and amortization is referring to the change of value in assets. Things such as machines that lose value over time are subject to depreciation, while assets such as property can gain value over time. Since depreciation and amortization isn’t a real life expense or credit, accountants from public companies must estimate this number and average it over several years. In this case (JNJ), the number is positive.
–Stock based compensation: This takes into account stock options that are paid to employees. You might be thinking, “well we already counted stock options, that’s why EPS is diluted.” This is not true. Stock based compensation is recorded as an expense on the balance sheet (in this case a credit), because the receiving employee has an option whether to keep or sell the stock option.
In the case where the employee sells the stock option, the company receives that currency and yet the shareholders are still diluted. Which is exactly why we see a positive number in this case, more employees sold their stock options than kept them, thus the surplus which is accounted for in the cash flow statement example.
–Noncontrolling interest: If a company owns part of a business but not a majority of shares, and thus doesn’t control the business, then they are known as a noncontrolling interest. Note that this is separate from equity ownership through shares and the stock market, which we will see later in the investing activities section of this cash flow statement example.
–Venezuela currency devaluation: This is a special case line for Johnson and Johnson. You won’t see this in every company’s cash flow statement, because not every company does business there.
–Asset write-downs: This is exactly what it sounds like. When an asset is being overvalued by the company compared to its market value, management has to eventually write-down that asset to its current value. This can help the company save on taxes.
–Net gain on equity investment transactions: The profit or loss from the company’s stock market investments. Keep in mind that this number is different from “Sales from investments” and “Purchases of investments” below, primarily because this net gain is focused on equity investments and doesn’t include fixed income or other investments outside of equity.
–Deferred tax provision: This has to do with the deprecation and amortization of assets that we were talking about earlier. As asset prices increase or drop, the tax liability changes with it. The difference in taxes when that is taken into account is put here.
–Accounts receivable allowances: When companies charge clients for services, they create an invoice with an expected due date to pay. This is often used in large orders and in b2b (business to business transactions). Debts that were not collected are called allowance for doubtful accounts, and it is here on the cash flow statement that these are found. The reason you see this number negative here is that it must balance the accounts receivable number to account for negligent accounts.
–Changes in assets and liabilities: Exactly what it sounds like. Transactions regarding the balance sheet and effects of that to the company’s cash are recorded here.
–Additions to property, plant and equipment: This is obviously an expense. This is money that a company has spent to improve their assets.
–Proceeds from the disposal of assets: Again, this is just what it sounds like. Disposal of an asset is just the sale of an asset.
–Acquisitions, net of cash acquired: Companies often acquire other companies in order to grow their top and bottom lines. Sometimes they finance these transactions, and sometimes they use cash. Also, sometimes a company they are acquiring comes with cash. This is where all of that is included.
–Purchases of investments: The grand total spent on investments (stocks, bonds, and others) for the year.
–Sales of investments: Proceeds from any investments that were sold for the year.
–Other (primary intangibles): It’s hard to know exactly what they are referring to here, as every company’s “other” section could mean something different. It’s likely that intangibles is referring to assets such as brand value and/or economic goodwill, among other things.
–Dividends to shareholders: This is how much the company spent to pay dividends.
–Repurchase of common stock: Also an expense, this is how much the company spent to repurchase shares.
–Proceeds from short-term / long-term debt: How much money the company received from taking on debt.
–Retirement of short-term / long-term debt: How much debt the company paid off.
–Proceeds from the exercise of stock options/excess tax benefits: This is the money received from employee stock purchase programs of company stock.
–Other: Could be anything.
As you can see from this in-depth example, there’s many places of management discretion. This is another reason why I don’t entirely focus on just the cash flow statement. It’s important to get the whole picture of the annual report, as I’ve often alluded to in the Income Statement Analysis and Balance Sheet Analysis.
START FROM THE BEGINNING:
1. How to Read Annual Reports for Beginners
CONTINUE READING THE GUIDE:
2. Simple Balance Sheet Analysis
3. Line-by-Line Balance Sheet Breakdown
4. Simple Income Statement Analysis
5. Line-by-Line Income Statement Breakdown
6. Simple Cash Flow Statement Analysis
7. Line-by-Line Cash Flow Statement Breakdown