Cash flows from investing activities definition
/What are Cash Flows from Investing Activities?
Cash flows from investing activities is a line item in the statement of cash flows, which is one of the documents comprising a company's financial statements. This line item contains the sum total of the changes that a company experienced during a designated reporting period in investment gains or losses, as well as from any new investments in or sales of fixed assets. Items that may be included in the investing activities line item include the following:
Purchase of fixed assets (negative cash flow)
Sale of fixed assets (positive cash flow)
Purchase of investment instruments, such as stocks and bonds (negative cash flow)
Sale of investment instruments, such as stocks and bonds (positive cash flow)
Lending of money (negative cash flow)
Collection of loans (positive cash flow)
Proceeds of insurance settlements related to damaged fixed assets (positive cash flow)
If a company is reporting consolidated financial statements, the preceding line items will aggregate the investing activities of all subsidiaries included in the consolidated results.
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How to Interpret Cash Flows from Investing Activities
The cash flows from investing activities line item is one of the more important items on the statement of cash flows, for it can be a substantial source or use of cash that significantly offsets any positive or negative amounts of cash flow generated from operations. It is particularly important in capital-heavy industries, such as manufacturing, that require large investments in fixed assets. When a business is reporting persistently negative net cash flows for the purchase of fixed assets, this is a strong indicator that the firm is in growth mode, and believes that it can generate a positive return on additional investments.
It can also be useful to examine these cash flows on a trend line. When there is a steady decline in investments in fixed assets, it can imply that management does not believe there are good investment opportunities within the business. If so, there should be an increase in dividend payouts, because management has chosen to instead send excess cash back to investors. Alternatively, a decline in investments in fixed assets could imply that the firm is not profitable, and no longer has the cash to make further investments. If so, the profit figure on the firm’s income statement should be low or negative.
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