Cash Flow Statement Analysis (+ Example)

1. Operating Activities:
   • Examining cash generated or used in the core business operations, including receipts from customers and payments to suppliers and employees.
   • Assessing the company’s ability to generate positive cash flow from its primary activities.
2. Investing Activities:
   • Analyzing cash flows related to the acquisition and disposal of long-term assets, such as property, plant, equipment, and investments.
   • Evaluating the company’s capital expenditure decisions and investment activities.
3. Financing Activities:
   • Reviewing cash flows associated with raising and repaying capital, including debt issuance, dividends, and stock repurchases.
   • Understanding how the company manages its capital structure and returns value to shareholders.

This data on Walmart Inc.’s cash flow statement for the years 2020 to 2023 provides insights into the company’s cash flow dynamics:

1. Operating Activities and Net Income:
   • Walmart’s operating cash flow has shown a positive trend over the years, reaching $28,841 million in 2023. However, the net income has seen a slight decline from $15,201 million in 2020 to $11,680 million in 2023.
   • The positive trend in operating cash flow indicates the company’s ability to generate cash from its core business operations and is effectively converting its sales into cash.
2. Investing Activities and Net Income:
   • Walmart’s negative investing activities cash flow suggests ongoing investments in the business, such as capital expenditures and acquisitions. This aligns with the company’s strategy of expanding and enhancing its operations, such as store expansions, technology, or acquisitions.
   • The decline in net income does not necessarily translate directly to decreased investment in the business, as it could be influenced by various factors such as non-operating expenses.
3. Financing Activities and Net Income:
   • Walmart Inc.’s consistently negative financing cash flow implies payment of dividends, debt repayment, and share repurchases. Despite the decline in net income, Walmart has been able to manage its financing activities to maintain its cash flow position.
   • The consistent negative financing activities might be part of the company’s capital structure management or returning value to shareholders.
4. Net Change in Cash:
   • The net change in cash represents the overall impact of operating, investing, and financing activities on the company’s cash position.
   • While there was positive net change in cash in 2020 and 2021, indicating a cash surplus, 2022 and 2023 show negative net changes.
   • The negative net change in cash in 2022 and 2023 is likely influenced by substantial investments and negative financing activities, despite positive operating cash flow.
5. Free Cash Flow:
   • Free cash flow, calculated as operating cash flow minus capital expenditures, provides insight into the cash available for dividends, debt reduction, or further investments.
   • Walmart’s free cash flow has varied, with a peak in 2021 and a subsequent decrease in 2022 and 2023. The decrease in free cash flow from 2021 to 2023 suggests increased capital expenditures or changes in working capital requirements.
   • The decrease in free cash flow in 2022 and 2023 may warrant further investigation into the company’s capital allocation decisions and future growth prospects.
6. Cash Flow Analysis:
   • Walmart has demonstrated a positive operating cash flow, indicating a healthy cash generation from its core business operations.
   • The negative net change in cash in 2022 and 2023 may be attributed to substantial investments in the business and other core financing activities.
   • It’s important to consider the reasons behind changes in net income, such as accounting adjustments or one-time events, when interpreting the financial performance.

1. Focus on Operating Cash Flow: Place a significant emphasis on the operating cash flow section. It provides insights into the company’s ability to generate cash from its core business operations.
2. Assess the Quality of Earnings: Examine the relationship between net income and operating cash flow. A positive operating cash flow that aligns with net income indicates healthy earnings quality.
3. Evaluate Liquidity Position: Using financial ratios, analyze changes in working capital components, such as accounts receivable, inventory, and accounts payable, to assess the company’s liquidity position.
4. Understand Investing Activities: Assess the company’s investment decisions by examining cash flows related to the acquisition and disposal of long-term assets. Positive investing cash flows may indicate strategic investments.
5. Examine Financing Activities: Evaluate the company’s financing decisions by analyzing cash flows related to debt, dividends, and equity transactions. It provides insights into capital structure management and shareholder value.
6. Calculate and Analyze Free Cash Flow: Compute free cash flow to understand the amount of cash available after covering operating expenses and capital expenditures. Positive free cash flow can be used for dividends, debt reduction, or investments.
7. Consider Trends Over Time: Conduct trend analysis by comparing cash flow statements over multiple periods. Identifying consistent trends helps in understanding the company’s cash flow trajectory.
8. Look for Consistency with Industry Benchmarks: Compare the company’s cash flow performance with industry averages or competitors. This provides context and helps assess relative standing.
9. Assess Cash Conversion Cycle: Calculate and analyze the cash conversion cycle to understand how efficiently the company converts investments in inventory and receivables into cash.
10. Evaluate Cash Flow Adequacy: Consider whether the operating cash flow is sufficient to cover capital expenditures, debt obligations, and dividend payments. This evaluation ensures the company’s financial sustainability.
11. Scrutinize Non-Operating Cash Flows: Pay attention to non-operating cash flows, such as those related to extraordinary items or one-time events. Understand their impact on overall cash flow.
12. Consider External Factors: Take into account external factors, economic conditions, or industry trends that may influence the company’s cash flow performance.
13. Review Disclosures and Footnotes: Read accompanying disclosures and footnotes to gain additional context on accounting policies, assumptions, and potential risks.
14. Seek Clarifications if Needed: If uncertainties or complexities arise, don’t hesitate to seek clarifications from financial statements, management, or other reliable sources.

In conclusion, the key to conducting a successful cash flow statement analysis is to focus on cash flows from operating, investing, and financing activities, assess the quality of earnings by comparing net income to cash flow activities, and consider trends over time, ensuring a thorough evaluation of a company’s liquidity, investment decisions, and financing activities.