<First, so that I'm absolutely clear on this, the figure for net cash flow is the same as that for gross cash flow if cash flow from investments and cash flow from financing are both positive, yes? IOW, the only time net and gross diverge is when either cash flow from investments or cash flow from financing is negative.>
In order for Net Cash Flow and Gross Cash Flow to be the same, Cash Flow from financing and investments must = 0, creating the following gross cash flow =10, cash from financing, financing expenses and investments = 0, therefore;
Gross cash flow less cash from financing expenses plus cash from financing less investments = 10 which would also be equal to net cash flow.
If the 0 figure were a positive number, it would alter the net cash flow figure. I hope that explains it. Cash flow is actually the simplest concept in finance. Think of the mom and pop shop on the corner. They have a cigar box which is filled with money at the end of business each day. This money represents the costs and revenues encountered in every day operations. That is the cash flow, simple as that. Money from loans would represent cash from financing (added to cash), interest payments would represent money going to financing expenses, capital expenditures and investments such as boilers/furnaces/cash registers and buying out other stores would represent the components that you would subtract to get to the net cash flow. In my opinion, it is this simplicity which makes cash flow analysis so much more reliable than accounting earnings. Pure cash comes without fancy GAAP ambiguities and interpetations, therefore is much more difficult to manipulate. Remember, though, correlation does not prove causality. There could be other underlying factors which may cause the market value to appear to correlate with cash flow (although I doubt so:-). That is the reason I run the analysis for 4,000 companies instead of just four or five. |
