Unfortunately, specific information on how the derive the net cash from a 10-k’s cash flow statement is practically missing from the internet right now. Let me debunk all of the confusion and options surrounding cash and cash flow analysis, explain the definitions, and tell you why I think the popular opinion of using cash flow to determine intrinsic value is flawed.
There’s various definitions of net cash online, like Investopedia’s “total cash – total liabilities”, or Business Dictionary’s “cash on-hand – current liabilities”.
You can see that immediately, the specific definition of net cash is debatable. We see a commonality between the top two results on Google, but the fact that there’s a discrepancy between either representing total or current liabilities means the definition of net cash may be different depending on who you talk to.
It’s not like net income, which everyone defines as revenue minus expenses. Or shareholder’s equity, which is specifically defined as total assets minus total liabilities.
Also understand that net cash is a different definition of net cash flow. Net cash flow refers to the change in the cash balance between 1 year to the next. I understand this is starting to get really confusing, especially because the word “cash balance” and “net cash” aren’t actually on the 10-k annual report for every company. Let me take the biggest company right now, $AAPL, and show you their cash flow statement and define these terms based on that.
Now, when I say cash balance, I’m talking about the “cash and cash equivalents, beginning of the year” and “cash and cash equivalents, end of the year”. You can use either one of these, depending on which year you are looking at. Notice the beginning of the year cash balance for 2016 is the same as the end of year cash balance for 2015. This makes sense, we are just reporting how much cash a company has “in the bank”, or the cash balance.
Net cash flow is the change in the cash balance between the beginning of the year and the end of the year for the same year. You can see they put this number as “Increase/(Decrease) in cash and cash equivalents” on the 10-k, near the bottom of the page.
Another way to calculate net cash flow, which is a good sanity check to help us understand exactly what is going on with the cash flow statement, is to add all 3 of the following metrics:
- Cash generated by operating activities
- Cash used in investing activities
- Cash used in financing activities
Now let me explain each metric in the simplest of terms. [click to continue…]