Cash Flow Statement – Cash Flows from Investing Activities
This section of the cash flow statement shows the amount of cash companies spend on investments. Investments are usually classified as either capital expenditures – money spent on items such as new equipment or anything else needed to keep the business running – or monetary investments such as the purchase or sale of government bonds. The most important parts of this section for investors are typically the capital expenditures line item and the line item for acquisitions of other businesses. Purchases are negative because they use up cash, and sales are positive because they result in more cash.
Capital Expenditures (Capex)
Capital expenditures, also known as “capex,” represent the amount of cash a company has invested in long-lasting assets like property, plant, and equipment (PP&E). These investments, which can include remodeling existing stores, replacing equipment, and building new stores, are essential to maintaining and growing the business. They appear in the “cash flows from investing activities” section under the “capex” line item.
In the initial purchase year, cash is used immediately, resulting in a large negative outflow for a single year as opposed to being expensed over a period of several years. If a company buys a property for say RM500,000, that’s going to last for many years, maybe 20 or 30 years., thus Capex will not be shown in Income Statement. Capex goes to Cash Flow from Investing instead. Capex will not impact profits and returns. On one hand, you should expect depreciation expenses in future. On the other hand, improved productivity will boost future sales.
A negative capital expenditures figure can signal a company’s investment in expanding its business through the acquisition of fixed assets. It’s essential to evaluate if these investments are strategically sound and aligned with the company’s growth prospects. When analyzing capital expenditures, it’s important to ensure they are increasing at a similar rate as the company’s revenues. A company experiencing rapid growth may need to make capital expenditures to sustain its pace, while a company with declining sales and stagnant capital expenditures may face challenges if the sales decline is due to poor management decisions or competition, not just market or industry factors.
The amount of capital expenditures can vary depending on the industry. Generally, manufacturing companies with large plants have higher capital expenditures compared to companies with significant intangible assets, such as investment firms.
The counterpoint of capital expenditures is Operating Expense or OPEX. This is the on-going cost for running a product, business, or system.
| CAPEX | OPEX |
|---|---|
| Buys a copy machine | Buys toner and paper to operate the copy machine |
| Installing a new bathroom | Fixing the broken toilet |
Short-term and Long-term Investments
Long-term investments are to be held for many years and are not intended to be disposed of in the near future. Opposite to long-term investments, short-term investments are to be held for less than 12 months.
In accounting, the classification of an investment as long-term or short-term depends on the length of time the investment is expected to be held. A long-term investment is typically an investment that is expected to be held for more than a year, while a short-term investment is expected to be held for less than a year. The length of time an investment is expected to be held is determined based on the company’s investment policy and the purpose of the investment.
For example, a company may purchase stocks with the intention of holding them for the long-term to generate a steady stream of income, in which case those stocks would be classified as long-term investments. On the other hand, if a company purchases stocks with the intention of quickly reselling them for a profit, those stocks would be classified as short-term investments.
It is important to note that the actual holding period of an investment may differ from the original intention, and companies may need to reclassify their investments as long-term or short-term based on changes in circumstances or their investment policies.
Example:
- Investments in other firms, acquisitions and divestitures of subsidiaries
- Commodity hedges
- Currency hedges
- Marketable securities.
Click here to learn how we treat Short-term Investments.
Net Cash from Investing Activities
Net cash from investing activities is the total of all the line items in this section. Typically, a healthy company will have a negative figure, indicating that they are reinvesting their cash from operations into the company to drive growth and generate future profits.