Net Cash Flow
What It Is:
Net cash flow refers to the difference between a company's cash inflows and outflows in a given period. In the strictest sense, net cash flow refers to the change in a company's cash balance as detailed on its cash flow statement.
How It Works/Example:
Net cash flow is also known as the "change in cash and cash equivalents." It is very important to note that net cash flow is not the same as net income, free cash flow, or EBITDA.
You can approximate a company's net cash flow by looking at the period-over-period change in cash on the balance sheet. However, the statement of cash flows is a more insightful place to look. Net cash flow is the sum of cash flow from operations (CFO), cash flow from investing (CFI), and cash flow from financing (CFF).
Let's look at the 2010 cash flow statement for Wal-Mart (NYSE: WMT) as presented by Yahoo! Finance. At the bottom of the cash flow statement, we see that the change in cash and cash equivalents is calculated to be $632 million. This means that when the cash flow from operations, cash flow from investing, and cash flow from financing is added up, Wal-Mart added $632 million to its cash balance in 2010.
*All numbers in thousands
**Source: Yahoo! Finance
Why It Matters:
Net cash flow is the fuel that helps companies expand, develop new products, buy back stock, pay dividends, or reduce debt. It is what allows companies to conduct their day-to-day business. This is why some people value net cash flow more than just about any other financial measure, including earnings per share. Revenues and expenses are big drivers of net cash flow.
Without long-term positive net cash flow, a will fail, but company can offset short-term negative cash flow by borrowing. It is important to note that short-term negative net cash flow is not always a bad thing. For example, if a company needs to spend cash to build a second manufacturing plant, the investment will pay off in the end as long as the plant eventually generates more cash than it cost to build.
Investors often hunt for companies that have high or improving net cash flow but low share prices--the disparity often means the share price will soon increase. To learn more about using cash flow in your company analysis, click here to read, With This Ratio, Cash Flows Are King.