Many analysts and investors consider cash flow the most important of a company’s financial statements. Public companies are required by most exchanges to report all cash inflows from ongoing operations, investments and financing activities, and cash outflows.

Cash inflows and outflows show where the company’s cash comes from and how it is spent over the period of one year.

Cash flow can be positive even if the company is not profitable. It does not account for assets and liabilities, accounts receivable or accounts payable. It needs to be analyzed in conjunction with the other financial statements to provide a complete picture of a company’s health.

In “Avoiding Future Enrons,” the Columbia Journalism Review (CJR) noted that journalists reporting on deadline tend to focus on revenue and profit reported in the income statement.

“But studying cash flow figures, especially from operations, gives a much clearer view of how much money is actually coming in and out of a business in a given period, and can be more revealing,” Anya Schiffrin wrote in the CJR article.

A company may be making a profit but still show negative cash flows from operations. One reason is that sales may be made on credit and the receipt of cash will depend on how reliably the payments are made later. Continuing negative cash flows from operations is a red flag. Without cash, a company cannot pay its employees or cover other running expenses.

Recurring negative operating cash flows are a bad sign as they indicate the company is not generating net cash from its normal operations. If this continues, the company would likely be in financial trouble in the near future.

Operating cash flows may also be artificially increased by the company stretching out or delaying payments. It will show in the cash flow statement as a decline in operating cash outflows. However, this is not sustainable as eventually the company’s creditors will put pressure on the company for timely payments. A comparison of the “cash outflows from operations ”with the “accounts payable” in the balance sheet would reveal this.

For an explanation of cash flow and a sample cash flow statement, see: http://bit.ly/HRM3eE