The last installment of the financial statements trilogy (which is usually the most boring as well) is the cash flow statement. To most people, the cash flow statement is of least importance and perhaps that is why it is always found after the other two. However, as with trilogies, it is also where you can find the truth about companies. But son, you can't handle the truth!
The conventional thinking is that it is easy to manipulate earnings, costs or even sales but it is much harder for companies to manipulate cash flows.
Cash flow measures the actual inflow and outflow of cash into and out of the firm. Hence while sales can be manipulated (e.g. by recognising sales from the future), a cash outflow is a cash outflow. When a cash outflow becomes a cash inflow, there are only two explanations:
1) This is fraud, the no.s are fake, don't trust them
2) The money is in the washing machine, going through the laundry
A company that has a poor cashflow is something to look out for. It is usually an early warning for bigger trouble to come. Avoid at all cost.
The cash flow statement is also further classfied into three sub segments (whoa...a trilogy within a trilogy...)
1) The cash flow from operations or operating cash flow (CFO)
2) The cash flow from investments or investing cash flow (CFI)
3) The cash flow from financing or financing cash flow (CFF)
The most important no. to look out for is undoubtedly the operating cash flow (CFO), *For the really blur people reading this, pls don't get confuse with the other CFO which stands for Chief Financial Officer*.
This no. (i.e. CFO) measures the actual cash inflow from the firm's core operations and it should always be a positive number. If it is not, it means the company cannot earn money from its core businesses and all alarms should sound and you should press the panic button and unload everything, if you own it, and avoid at all cost if you don't.
See also Cash flow from financing