The market crash is here
Forget profits -- Free cash flow matters now more than ever
If you're an individual investor, you MUST know how to read a CASH FLOW STATEMENT
Here's what you need to know:
The cash flow statement shows cash moving in and out of a company over specific time periods.
Since it's May right now, the two most common will be:
⚫️ 1 Quarter
⚫️ 1 Year
Below, we can see CrowdStrike's cash flow over the past year. The time frame is at the top $CRWD
Since it's May right now, the two most common will be:
⚫️ 1 Quarter
⚫️ 1 Year
Below, we can see CrowdStrike's cash flow over the past year. The time frame is at the top $CRWD
There are three key parts to a cash flow statement:
1⃣ Operating Activities (Running the business)
2⃣ Investing Activities (Investing in the business)
3⃣ Financing Activities (Paying for the business)
There's freedom in how it gets reported, but this is the basic structure
1⃣ Operating Activities (Running the business)
2⃣ Investing Activities (Investing in the business)
3⃣ Financing Activities (Paying for the business)
There's freedom in how it gets reported, but this is the basic structure
Let's specifically look at operating activities
The top line-item is NET INCOME.
You'd think this would represent the money a company puts in the bank at the end of the year.
But that's NOT THE CASE
The top line-item is NET INCOME.
You'd think this would represent the money a company puts in the bank at the end of the year.
But that's NOT THE CASE
Net Income backs out NON-CASH charges. The cash flow statement adds them back in.
Including:
⚫️ Depreciation: Value of asset decreasing
⚫️ Amortization: Expensing pre-paid cost
⚫️ Stock-Based Compensation: Paying employees w/ equity
Including:
⚫️ Depreciation: Value of asset decreasing
⚫️ Amortization: Expensing pre-paid cost
⚫️ Stock-Based Compensation: Paying employees w/ equity
Next, working capital leads to cash being added or subtracted.
This covers:
⚫️ Accounts Receivable: Sales not yet collected
⚫️ Accounts Payable: Bills not yet paid
⚫️ Inventory: Value of "stuff" not yet sold
This covers:
⚫️ Accounts Receivable: Sales not yet collected
⚫️ Accounts Payable: Bills not yet paid
⚫️ Inventory: Value of "stuff" not yet sold
When all of those things are accounted for, you get OPERATING CASH FLOW.
The easiest way of thinking about it: this is a company's REAL net income -- on a cash (and not accrual) basis.
The easiest way of thinking about it: this is a company's REAL net income -- on a cash (and not accrual) basis.
The next section is investing activities.
The first line item is very important:
CAPITAL EXPENDITURES
⚫️ Cash spent to acquire or maintain property, plant, buildings, or equipment.
⚫️ Cash spent to develop internally-used software
The first line item is very important:
CAPITAL EXPENDITURES
⚫️ Cash spent to acquire or maintain property, plant, buildings, or equipment.
⚫️ Cash spent to develop internally-used software
With these figures, we can now calculate FREE CASH FLOW.
This is the money a company generates from business after paying for capital expenditures.
This is one of the most important financial metrics in my investing framework
This is the money a company generates from business after paying for capital expenditures.
This is one of the most important financial metrics in my investing framework
Why?
FCF tells a very different story than NET INCOME
Consider $CRWD
📉Net LOSSES last year expanded nearly 150% to ($232 million)
😟That seems pretty bad
FCF tells a very different story than NET INCOME
Consider $CRWD
📉Net LOSSES last year expanded nearly 150% to ($232 million)
😟That seems pretty bad
But there are two HUGE caveats:
1⃣ ~$450 million in stock-based compensation (SBC).
2⃣ ~$950 million in deferred revenue.
The latter represents fees $CRWD has already collected for service in the future. It's in the bank.
(Note: SBC *does* dilute shareholders)
1⃣ ~$450 million in stock-based compensation (SBC).
2⃣ ~$950 million in deferred revenue.
The latter represents fees $CRWD has already collected for service in the future. It's in the bank.
(Note: SBC *does* dilute shareholders)
Incredibly, when you do the math, $CRWD produced:
💰$357 million in Operating Cash Flow in Fiscal 2021
💰$575 million in Operating Cash Flow in Fiscal 2021
💰$357 million in Operating Cash Flow in Fiscal 2021
💰$575 million in Operating Cash Flow in Fiscal 2021
To find Free Cash Flow, we subtract out Capital Expenditures.
When we do, $CRWD Free Cash Flow numbers are:
💰$293 million in Fiscal 2021
💰$442 million in Fiscal 2021
When we do, $CRWD Free Cash Flow numbers are:
💰$293 million in Fiscal 2021
💰$442 million in Fiscal 2021
Think about that.
😟While it's true that $CRWD Net Income LOSSES WIDENED 150%
🤑It's also true that $CRWD Free Cash Flow GAINS EXPANDED 51%
Knowing that is vitally important with stocks tanking and sources of funding drying up. The company can self-fund if it wants!
😟While it's true that $CRWD Net Income LOSSES WIDENED 150%
🤑It's also true that $CRWD Free Cash Flow GAINS EXPANDED 51%
Knowing that is vitally important with stocks tanking and sources of funding drying up. The company can self-fund if it wants!
You MUST know how to read a cash flow statement if you invest in stocks.
That's why @BrianFeroldi and I are excited to announce our first ever LIVE course:
Financial Statements Explained Simply
Click below to find out more and enroll
maven.com/brian-feroldi/…
That's why @BrianFeroldi and I are excited to announce our first ever LIVE course:
Financial Statements Explained Simply
Click below to find out more and enroll
maven.com/brian-feroldi/…
Generated by Thread Navigator
Press ⌘ + S to quick-export