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« Converting an Indirect Method Statement of Cash Flows to the Direct Method
Free Cash Flow »

Cash Analysis: Sources and Uses

Analyzing a firm’s cash position is essential to understanding its financial health. Investors need to know how the company is generating or obtaining its cash (the cash sources) and where that cash is being expended (cash uses). The cash flow statement identifies sources and uses directly within the financing and investing sections. If further detail is needed on operations, recasting that part of the statement to the direct method completes the picture.

For AT&T, a sources and uses presentation of cash flow for 2006 would look like this:

attsourcesuses.jpg

This presentation allows the analyst to see the source from which AT&T generates most of its cash: its customers. Most of its uses of cash are also for operating costs. It also deploys a large portion of its cash for capital expenditures. The company has made acquisitions using stock instead of cash, so the acquisitions do not appear on the cash flow statement. However, there is still an impact in the large increase in capital expenditures relative to prior years, as the company is now replenishing the equipment of the acquired companies as well. Note that items such as these can also be compared to the related balance sheet accounts—in this case property, plant, and equipment—as well as other assets. Capital expenditures, net of depreciation, were actually slightly negative, yet balance sheet PP&E rose to $94.5 billion from $58.7 billion during 2006 as a result of the non-cash acquisitions. Finally, another key use of cash for AT&T was to pay dividends and repurchase shares. Of course, a greater number of shares was issued as part of the acquisition, and the company took on added debt that did not flow through the cash flow statement.

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis

See also:
  • Sources of Excess Return in International Bond Portfolios
  • Free Cash Flow
  • Reclassifying Pension Related Cash Flows for Analysis Purposes
  • EBITDA as an Estimate of Operating Cash Flow
  • Ratio Analysis
    • Technical Analysis Explained : The Successful Investor's Guide to Spotting Investment Trends and Turning Points

    The Intelligent Investor: The Classic Text on Value Investing

    Financial Statement Analysis: A Practitioner's Guide, 3rd Edition

    Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)

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