Investing and Financing Cash Flow#

After operating cash flow, the investing and financing sections show how the company deploys and raises capital. Together, they reveal strategy and financial health.

Investing Activities#

The investing section shows cash used for (or received from) long-term assets and investments.

Major Components#

Item	Cash Flow Direction
Capital expenditures (CapEx)	Outflow (negative)
Acquisitions	Outflow (negative)
Asset sales	Inflow (positive)
Investment purchases	Outflow (negative)
Investment sales/maturities	Inflow (positive)

Capital Expenditures (CapEx)#

CapEx is spending on property, plant, and equipment. It's crucial for understanding business investment.

Maintenance CapEx keeps existing capacity running (replacing worn equipment). Growth CapEx expands capacity or enters new markets. Understanding the split helps you assess true free cash flow.

CapEx Analysis

Metric	What It Shows
CapEx as % of Revenue	Investment intensity
CapEx vs. Depreciation	Growth vs. maintenance spending
CapEx trend	Investment direction

Key Insight: If CapEx consistently exceeds depreciation, the company is growing its asset base. If CapEx is below depreciation, it may be underinvesting.

Acquisitions#

Cash spent to buy other companies. Watch for:

Size relative to the acquiring company
Frequency of acquisitions
Success of past deals (watch for impairments later)

Serial Acquirers

Companies that constantly acquire can mask organic growth problems. Look at how much growth comes from acquisitions vs. existing business.

Asset Sales#

Cash received from selling property, equipment, or investments. Context matters:

Routine: Normal asset turnover
Strategic: Focusing on core business
Concerning: Selling assets to generate cash (desperation)

Financing Activities#

The financing section shows cash flows between the company and its capital providers (shareholders and lenders).

Major Components#

Item	Cash Flow Direction
Debt borrowed	Inflow (positive)
Debt repaid	Outflow (negative)
Stock issued	Inflow (positive)
Stock repurchased	Outflow (negative)
Dividends paid	Outflow (negative)

Debt Financing#

Activity	What It Signals
Borrowing increases	Funding growth or acquisitions
Consistent borrowing	May indicate operational cash shortfall
Debt repayment	Strengthening balance sheet
Refinancing	Often neutral (replacing old debt)

Net Debt Change

Look at the net change in debt over time, not just individual periods. Is overall debt going up or down?

Equity Financing#

Stock Issuance:

New shares dilute existing shareholders
Common for growth companies and startups
Watch for frequency and size

Stock Repurchases (Buybacks):

Returns cash to shareholders
Reduces shares outstanding (increases EPS)
Can signal management confidence—or mask problems

Buyback Scrutiny

Buybacks at high valuations destroy value. Check if buybacks happen when stock is cheap or expensive relative to earnings and book value.

Dividends#

Cash returned to shareholders as regular payments.

Dividend Pattern	Interpretation
Stable or growing	Confidence in cash generation
Declining	Cash flow problems or strategic shift
Special dividend	Excess cash or one-time event
No dividend	Growth focus or insufficient cash

Interpreting Cash Flow Patterns#

The combination of all three sections tells a story:

Healthy Growing Company#

Section	Pattern
Operating	Strong positive
Investing	Negative (investing in growth)
Financing	Small or negative (self-funding)

Translation: Generating cash from operations, investing in the business, and may be returning cash to shareholders.

Startup/High Growth#

Section	Pattern
Operating	Negative or small positive
Investing	Large negative
Financing	Large positive

Translation: Burning cash to grow, funded by investors (equity) or debt.

Mature Cash Cow#

Section	Pattern
Operating	Strong positive
Investing	Small negative
Financing	Large negative

Translation: Generating lots of cash, minimal investment needs, returning cash through dividends and buybacks.

Company in Trouble#

Section	Pattern
Operating	Weak or negative
Investing	Positive (selling assets)
Financing	Positive (borrowing)

Translation: Can't generate operating cash, selling assets and taking on debt to survive.

Cash Flow Sustainability#

Ask these questions:

For Investing#

Is CapEx adequate to maintain the business?
Are acquisitions creating or destroying value?
Is asset selling routine or desperate?

For Financing#

Is debt increasing or decreasing overall?
Are buybacks at sensible valuations?
Can dividends be sustained by operating cash flow?

The Self-Funding Test: Can the company fund its investing needs entirely from operating cash flow? If yes, it doesn't depend on external financing—a sign of financial strength.

Example Analysis#

Section	Year 1	Year 2	Year 3
Operating CF	$100M	$110M	$120M
Investing CF	($60M)	($80M)	($70M)
Financing CF	($30M)	($20M)	($40M)
Net Change	$10M	$10M	$10M

Analysis: This company shows healthy patterns:

Growing operating cash flow
Consistent investment in the business
Returning cash through financing (likely dividends/buybacks)
Net positive cash accumulation

Key Takeaways

Investing activities show CapEx, acquisitions, and asset sales
CapEx should be compared to depreciation to understand growth vs. maintenance
Financing activities show debt changes, stock transactions, and dividends
Different business stages have different typical cash flow patterns
Healthy companies can self-fund investments from operating cash flow
Watch for warning signs like selling assets to fund operations