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Cash flow analysis

Cash flows are often transformed into measures that give information e.g. on a company’s value and situation:

Cash flow notion is based loosely on cash flow statement accounting standards. The term is flexible and can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows.

Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement:

Business’ financials

The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow for a project is the sum of cash flows that are classified in three areas:

Depreciation*(tax rate) which locates at the end of the formula is called depreciation shield through which we can see that there is a negative relation between depreciation and cash flow.

The sum of the three component above will be the cash flow for a project.

And the cash flow for a company also include three parts:

The sum of the three components above will be the total cash flow of a company.

Further Reading

  • Agency costs of free cash flow, corporate finance, and takeovers – [PDF]
  • Investment-cash flow sensitivities are not valid measures of financing constraints – [PDF]
  • Evidence on the role of cash flow for investment – [PDF]
  • Do financing constraints explain why investment is correlated with cash flow? – [PDF]
  • Do investment-cash flow sensitivities provide useful measures of financing constraints? – [PDF]
  • Financial development and the cash flow sensitivity of cash – [PDF]
  • Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis – [PDF]
  • Free Cash Flow (FCF), Economic Value Added (EVA™), and Net Present Value (NPV):. A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation – [PDF]
  • Dividend announcements: Cash flow signalling vs. free cash flow hypothesis? – [PDF]
  • A comparables approach to measuring cashflow‐at‐risk for non‐financial firms – [PDF]