While the markets often focus on items such as net income, total assets, earnings per share, net worth, PE ratio, etc., the fact is this: You can't spend any of those things. You can, however, spend cash -- arguably the most important measure of immediate value.
          Unfortunately, the "Consolidated Statement of Cash-flows" is the last document in a presentation of "Standard Financial Statements." First is the Balance Sheet (primarily a measure of assets), then the Income Statement (mainly a presentation of earnings) and after that, almost as an afterthought, is the Cash-Flow statement. By the time most readers digest the first two presentations, there's hardly space for the beleaguered Statement of Cash-Flows. Nevertheless, this statement is the most valuable component of the financials. Why? Because cash is cash; you can spend cash.
          Since our society has evolved to the point where we use "fiat money" rather than actual merchandise in our transactions, cash is the medium by which we convert and conduct all our business. ("Fiat money" is money the government declares is legal tender, rather than something of intrinsic value such as chickens, firewood, etc.) By contrast, if we still lived in a commodities-based culture such as farming, for example, we might create a report called the Statement of Cow-Flows.
          For the investor, the Statement of Cash-Flows is the place to start when looking for insights into the management of an enterprise. Aside from the obvious measure of how much cash is on hand, the statement shows where the currency came from and where it went. The Statement of Cash-Flows provides three major categories for presentation. They are: cash provided by or (used) from 1) operating activities; 2) investing activities; and 3) financing activities.
          The first thing to observe on a Statement of Cash-Flows is the proportion of cash provided by each of the three areas mentioned above. The mixture provides an indication of the company's maturity, focus, strength and emphasis. A company whose main source of cash is not from operations may be new, in transition, in trouble, heavily involved in ancillary activities or any combination thereof.
          The reason there is such a need for cash-flow analysis is due to something called "accrual" accounting. Under the accrual method of accounting, a company may recognize revenue as soon as there is an event that creates an obligation on the part of the customer to pay. The same is true for expenses documented by the company when it has an obligation to pay a supplier.           Revenue does not mean cash was received. Expense does not mean cash was paid out. There is a vast difference between revenue from operating activities and cash from operating activities. You can't spend revenue.
          An example of accrual accounting is: I "sell" you a glass of lemonade on a hot day, you give me a smile and promise to pay me in a week. I gave you the product, you promised to pay me, but I have no cash. Therefore, I earned some revenue but received no fiat money for my goods.
          Within the category of "cash from operating activities," there are several things the potential investor will want to note, including:
          o Gains or losses from the sale of assets -- Is the company inflating net income through the sale of assets, rather than sound operating activities?
          o Gains or losses from the sale of investments -- The investor should ascertain what the investments were in the first place and why they were sold.
          o Cash provided or used by certain changes in receivables, payables, prepaid expenses, and inventory -- If the amounts for receivables and payables are not substantially the same, there may be a collection problem. If payables are increasing, there may be an underlying cash crunch or a brewing dispute with a supplier. Excessive inventory buildup or depletion may be discovered here as well.
          A basic sign of a mature, vigorous company is that cash from operations is greater than net income. If that's not the case, then the prospective investor must look deeper to discover what's really going on. Many times it means that the firm is new and still raising capital or investing in plant and equipment. However, the savvy investor will know this by analysis, not assumption.
          Within the "cash from investing and financing activities," notable items to watch for are:
          o Capital expenditures -- Is the company investing in itself? The type of purchases should be revealed in the "notes to the financial statements."
          o Dividends paid -- Watch for trend fluctuations. If there is a jump from previous periods, ask why.
          o Issuance or repurchase of stock -- Did the company recently issue a significant amount of stock? What will this do to your current or contemplated holdings? Any large amounts reported as "certain other" deserve special investigative attention.
          Amid ever-increasing uncertainty and distrust of financial reporting, one statement remains readily available as a window into the real dealings of a firm. The next time you pick up an annual report, read the Statement of Cash Flows first. Because at the end of the day, cash is what you want. Why? Because cash is cash -- and you can spend cash.