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:‡οΈ
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:‡οΈ
The cash flow statement shows cash moving in and out of a company over specific time periods.
Since it's Jan right now, the two most common will be:
β«οΈ 3 Quarters
β«οΈ 1 Year
Below, we can see CrowdStrike's cash flow over the past 9 months. The time frame is at the top $CRWD
Since it's Jan right now, the two most common will be:
β«οΈ 3 Quarters
β«οΈ 1 Year
Below, we can see CrowdStrike's cash flow over the past 9 months. The time frame is at the top $CRWD
There are three key parts to a cash flow statement:
1β£ Operating Activities (Running the business)
2β£ Investing Activities (Investing in the business)
3β£ Financing Activities (Paying for the business)
There's freedom in how it gets reported, but this is the basic structure
1β£ Operating Activities (Running the business)
2β£ Investing Activities (Investing in the business)
3β£ 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:
β«οΈ Depreciation: Value of asset decreasing
β«οΈ Amortization: Expensing pre-paid cost
β«οΈ Stock-Based Compensation: Paying employees w/ equity
Including:
β«οΈ Depreciation: Value of asset decreasing
β«οΈ Amortization: Expensing pre-paid cost
β«οΈ Stock-Based Compensation: Paying employees w/ equity
Next, working capital leads to cash being added or subtracted.
This covers:
β«οΈ Accounts Receivable: Sales not yet collected
β«οΈ Accounts Payable: Bills not yet paid
β«οΈ Inventory: Value of "stuff" not yet sold
This covers:
β«οΈ Accounts Receivable: Sales not yet collected
β«οΈ Accounts Payable: Bills not yet paid
β«οΈ 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
β«οΈ Cash spent to acquire or maintain property, plant, buildings, or equipment.
β«οΈ Cash spent to develop internally-used software
The first line item is very important:
CAPITAL EXPENDITURES
β«οΈ Cash spent to acquire or maintain property, plant, buildings, or equipment.
β«οΈ 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
πNet LOSSES in the first 9 months of the past two years have been over $300 million
πThat seems pretty bad
FCF tells a very different story than NET INCOME
Consider $CRWD
πNet LOSSES in the first 9 months of the past two years have been over $300 million
πThat seems pretty bad
But there are two HUGE caveats:
1β£ ~$590 million in stock-based compensation (SBC).
2β£ ~$860 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)
1β£ ~$590 million in stock-based compensation (SBC).
2β£ ~$860 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:
π°$415 million in Operating Cash Flow in the 2021 time period
π°$668 million in Operating Cash Flow in the 2022 time period
π°$415 million in Operating Cash Flow in the 2021 time period
π°$668 million in Operating Cash Flow in the 2022 time period
To find Free Cash Flow, we subtract out Capital Expenditures.
When we do, $CRWD Free Cash Flow numbers are:
π°$315 million in the first 9 months of 2021
π°$467 million in the first 9 months of 2022
When we do, $CRWD Free Cash Flow numbers are:
π°$315 million in the first 9 months of 2021
π°$467 million in the first 9 months of 2022
Think about that.
πWhile it's true that $CRWD Net Income LOSSES were over $300M
π€It's also true that $CRWD Free Cash Flow GAINS were nearly $800M
Knowing that is vitally important with stocks tanking and sources of funding drying up. The company can self-fund if it wants!
πWhile it's true that $CRWD Net Income LOSSES were over $300M
π€It's also true that $CRWD Free Cash Flow GAINS were nearly $800M
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.
Want help? @BrianFeroldi and I teach a live course that gets rookies up to speed, FAST
Interested? DM me for a coupon code for $200 off
maven.com
Want help? @BrianFeroldi and I teach a live course that gets rookies up to speed, FAST
Interested? DM me for a coupon code for $200 off
maven.com
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