What is Cash Flow from Investing Activities?
Cash Flow from Investing Activities accounts for purchases of long-term assets, namely capital expenditures (CapEx) — as well as business acquisitions or divestitures.
- What is the definition of cash flow from investing activities?
- What are the steps to calculating the cash flow from investing activities amount?
- For most companies, which cash outflow is the largest expenditure?
- What are the most common line items in the cash from investing section?
Cash Flow from Investing Section
The cash flow statement (CFS) contains three sections:
- Cash Flow from Operating Activities (CFO)
- Cash Flow from Investing Activities (CFI)
- Cash Flow from Financing Activities (CFF)
The subsequent section is the CFI section, in which the cash impact from the purchase of non-current assets such as fixed assets (e.g. property, plant & equipment, or “PP&E) is calculated.
Compared to the cash from operations section, the cash from investing section is more straightforward, as the purpose is to simply track the cash inflows/(outflows) related to fixed assets and long-term investments across a specific period.
Cash Flow from Investing Line Items
Items reported on a cash flow statement for investing activities include purchases of long-term assets such as property, plant, and equipment (PP&E), investments in marketable securities such as stocks and bonds, as well as acquisitions of other businesses (M&A).
|Cash from Investing Activities||Definition|
|Capital Expenditures (CapEx)||The purchase of long-term fixed assets (PP&E).|
|Long-Term Investments||The security type could be either stocks or bonds.|
|Business Acquisitions||The acquisition of other businesses (i.e. M&A) or assets.|
|Divestitures||The proceeds from the sale of assets (or a division) to a buyer in the market, typically a non-core asset.|
Cash from Investing Activities Formula
So far, we’ve outlined the common line items in the cash from investing activities section.
The formula for calculating the cash from investing section is as follows.
Cash Flow from Investing Activities = (CapEx) + (Purchase of Long-Term Investments) + (Business Acquisitions) – Divestitures
Note that the parathesis above denotes that the respective item should be entered as a negative value (i.e. cash outflow).
In particular, CapEx is typically the largest cash outflow — in addition to being a core, recurring expenditure to the business model.
- If the CFI section is positive, that in all likelihood means that the company is divesting its assets, which increases the cash balance of the company (i.e. sale proceeds).
- By contrast, if CFI is negative, the company is likely investing heavily into its fixed asset base to generate revenue growth in the coming years.
Given the nature of the CFI section — i.e. primarily spending — the net cash impact is most often negative, as CapEx and related spending is more consistent and outweighs any one-time, non-recurring divestitures.
If a company is consistently divesting assets, one potential takeaway would be that management might be going through with acquisitions while unprepared (i.e. unable to benefit from synergies).
But a negative cash flow from investing section is not a sign of concern, as that implies management is investing in the long-term growth of the company.