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Finance GlossaryCash Flow Statement
Cash Flow Statement
Definition of Cash Flow Statement
A cash flow statement is used to present the amount of money that has been earned and spent by a business over a specific period of time. There are three sections or parts to a cash flow statement:
- Operating Activities: cash flows from the core activities of a business that generate income as well as cash equivalents (current assets & liabilities)
- Investing Activities: cash flows from investments or sales of long term assets
- Financing Activities: an action or activity that brings a change in a business’ equity capital and/or borrowings
Related Terms
Foreign Portfolio Investment
A Foreign Portfolio Investment includes stocks, bonds, ETFs, derivatives, and other financial instruments from another country. Generally, FPIs do not give an investor the right to ownership or a controlling stake in any organization.
Instead, FPIs act as a passive income vehicle. That’s why FPIs are different to Foreign Direct Investment (FDI) in which an ownership stake is acquired with the intention of controlling and influencing business decisions.
Anchoring and Adjustment
Anchoring is a bias that drives people to make decisions that are based on (anchored to) pre-existing notions, ideas, and suggestions that may or may not be true.
Adjustments around anchoring are common as it becomes a starting point for many when it comes to decision-making.
For example, someone is anchored to a financial model or strategy. They may choose to use the anchor in situations where it may not fit and as a result, may end up getting an unfavorable outcome.
Adjustments around anchoring are common as it becomes a starting point for many when it comes to decision-making.
For example, someone is anchored to a financial model or strategy. They may choose to use the anchor in situations where it may not fit and as a result, may end up getting an unfavorable outcome.
Plowback Ratio
The Plowback Ratio (or Retention Ratio) is the ratio of the net income of a company that is retained by the company to be reinvested in the company's business operations and growth (rather than paid out as dividends). The formula is: Plowback Ratio = (Net Income - Dividends Paid) / Net Income. High-growth companies in the IT or manufacturing sector often have a high plowback ratio as they see higher benefit in re-investing their profits to fuel expansion. A low plowback ratio indicates that a company is mature and returns a larger portion of its earnings to its shareholders.
Averaging Down
Averaging down means buying more shares when the price drops, thereby bringing down your overall average cost of investing. For example:
Day 1 (Normal price)
Day 1 (Normal price)
- Shares bought of XYZ: 10
- Price of each share: Rs. 1000
- Total cost of investing: Rs. 10,000
- Average investment cost: Rs. 1000
Day 2 (Lower price)
- Shares bought of XYZ: 10
- Price of each share: Rs. 900
- Total cost of investing: Rs. 9,000
- Average investment cost: Rs. 900
Averaging Down
- Initial average cost of investing (Day 1): Rs. 1000
- New average cost of investing (Day 1 & Day 2): Rs. 950
Free Cash Flow
In accounting and earnings reports, free cash flow refers to the amount of money a company has after paying its maintenance expenses, salaries, utility expenses, and other operating expenses as well as capital expenditures.
The formula to calculate free cash flow: Operating Cash Flow − Capital Expenditures
Free cash flow is an important metric, especially for investors because it is a direct indicator of the financial competence of a company. For example, the amount of FCF a company has can decide whether it has enough cash to offer dividends, expand business, buy back shares, etc.
The formula to calculate free cash flow: Operating Cash Flow − Capital Expenditures
Free cash flow is an important metric, especially for investors because it is a direct indicator of the financial competence of a company. For example, the amount of FCF a company has can decide whether it has enough cash to offer dividends, expand business, buy back shares, etc.
Promoter Holding
Promoter holding refers to the percentage of total shares held by the promoters of a company. Promoters are a group of individuals who are responsible for the foundation or management of the company. High promoter holding can signal strong management conviction in the future of the company, but can also lead to concerns about corporate governance and a lack of sufficient free float of shares for the public market.
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