Buffett believes that cash-flow numbers “are frequently used by marketers of business and securities to justify the unjustifiable and thereby sell what should be unsalable”.
Cash Flow is more applicable for established companies whose sales, receivables, and inventory generally don’t fluctuate rapidly and it is less applicable to new, high growth companies which incur ongoing costs to finance their growth in inventory and receivables.
The cash flow statement can be broken down into three components:
- Net Cash Flow From Operating Activities (Look for a high positive number)
- Net Cash Flow From Investing Activities (Look for a negative number)
- Nett Cash Flow From Financing Activities (Look for a negative number)
Be Careful when you observe Cash Flow from Operation is negative or less than Net Income for years; this may result from boosting accounts receivable.