Welcome to session 17 of the Investing for Beginners podcast. In today’s session, we will be discussing a very interesting topic that is near and dear to my heart, an in-depth analysis of the cash flow statement. If you are not an accountant, never fear because this will help explain some of the terms and give a better explanation of how they function.
In today’s session we will learn:
- What a cash flow statement is
- How it relates to the other financial statements included in the companies 10-k
- Breaking down the sections of the cash flow statement
- Highlighting some of the important line items to look for
- The differences between free cash flow and net cash
In this session, we are going to talk a little bit about Berkshire Hathaway, in honor of the recent annual meeting that they hold every year. We will look at how Warren Buffett, the master, lays out his cash flow statement.
Andrew: I think it’s important to understand where the cash flow statement lands when it comes to the financial statements in general. Every company needs to submit an annual report, and this is any company that is listed on any us stock exchange, they are all regulated by the SEC and are all required to submit what’s called a form 10-k. Which is an annual report, it shows the past three years of financial data on the income and the cash flow, and then the last two on the balance sheet.
When you hear these different statements that we are referring to. there are three major ones that are broken down into an income statement, which let me explain in a simple way what each of these three mean.
There is an income statement, balance sheet, and a cash flow statement. A great way to understand what happens on a business level is to compare to how it happens on a personal level because we all know how the personal level of finances work because we all live it. When you look at an income statement that’s the same as looking at someone’s tax return. What’s going to be on an income statement is how much money somebody makes as a salary from their job. Simple enough, really when you look at companies in the stock market, it’s the same way. It’s calculating how much they are earning every single year; it factors things like taxes, other accounting terms like depreciation and interest and all those types of things.
At the end of the day, you have this thing called the bottom line, and that’s the called the bottom line. Or another way to say profits, and it’s the bottom line on an income statement. That tells you how much a company earned, what their profits are and it’s the same way with you in your life. How much you bring home from your job, you can think of your gross income as what the revenue row is on the company’s income statement and then however much you pay in taxes. Then you have a net income, and that’s the same as the net income on the company’s income statement.
The next one would be the balance sheet if you think about a balance sheet for a company it is the same as a persn’s net worth. If you the person would add up everything you own minus all of your debts that gives you your net worth. Let’s say you have a spreadsheet; you have your house on there, the resale value of your car, and then maybe a couple of brokerage accounts, maybe a savings account or two, maybe a couple of retirement accounts. Then you have your debts, credit card, student loan, home equity line of credit and add all those things up on a spreadsheet they make your assets minus your liabilities which equals your net worth.
For a company it is the same way. They have a balance sheet, and there are all these different rows and columns, and all these different numbers. If you look closely enough, you will see it has the same concept as if you were making a spreadsheet at home. You have a row that’s called total assets, and then you have a row called total liabilities. Then when you subtract the total liabilities from the assets, you get what’s called shareholder’s equity. And that can be seen as the same as the net worth of a company.