Cash Flow from Operating Activities (CFO)
Candlefocus EditorCash flow from operating activities is the first item shown on a cash flow statement — the other two sections being cash flows from investing activities and financing activities. CFO refers to a company's profit after subtracting all operating expenses, including taxes, wages, depreciation and amortization. CFO can be measured by two separate methods: the indirect and the direct method.
The indirect method begins with a company's net income as reported in its income statement; then adds or subtracts non-cash items like depreciation and amortization. The indirect method only reflects the cash equivalent of non-cash activities. It is the most popular method and financial analysis generally uses the indirect approach.
In contrast, the direct method starts with cash inflows and outflows, and uses actual cash amounts on the cash flow statement. It is less popular for various reasons, including the lack of accuracy in tracking all cash transactions and being more time consuming.
Analyzing a company's CFO can provide insights into several aspects of its operations, including operational efficiency, liquidity and ability to generate funds from its core activities. By examining CFO, investors, bankers and analysts can gain an understanding of the company's financial health and the sustainability of its operations.
CFO helps to identify trends that may affect a company's future performance and gives investors an indication of how the company is doing financially. Businesses with higher CFO are often seen as healthier investments, as the money is being generated from their core operations. The higher the CFO, the more cash a company can reinvest in its operations and use for dividend payments. This can lead to more inherent value for stakeholders.
Overall, CFO is an important measure of a company's financial performance and health. Analysts and investors should review a business's CFO to assess its ability to generate funds and make decisions analyzing the overall health of the company.