Consider Apple’s (AAPL) 2014 10-K filing. The largest line items in the cash flow from the financing section are dividends paid, repurchase of common stock, and proceeds from the issuance of debt. Dividends paid and repurchase of common stock are uses of cash, and proceeds from the issuance of debt are a source of cash.
As a mature company, Apple decided that shareholder value was maximized if cash on hand was returned to shareholders rather than used to retire debt or fund growth initiatives. Though Apple was not in a high growth phase in 2014, executive management likely identified the low interest rate environment as an opportunity to acquire financing at a cost of capital below the projected rate of return on those assets.?
Similarly, consider Kindred Healthcare’s 2014 payday loans OH 10-K filing. The company engaged in a number of financing activities during 2014 after announcing intentions to acquire other businesses. Noteworthy line items in the cash flow from financing section include proceeds from borrowing under a revolving credit facility, proceeds from the issuance of notes, proceeds from an equity offering, repayment of borrowings under a revolving credit facility, repayment of a term loan, and dividends paid.
While Kindred Healthcare paid a dividend, the equity offering and expansion of debt are larger components of financing activities. Kindred Healthcare’s executive management team had identified growth opportunities requiring additional capital and positioned the company to take advantage through financing activities.?
Accounting Standards: IFRS vs. GAAP
U.S.-based companies are required to report under generally accepted accounting principles (GAAP). International Financial Reporting Standards (IFRS) are relied on by firms outside of the U.S. Below are some of the key distinctions between the two standards, which boils down to some different categorical choices for cash flow items. These are simply category differences that investors need to be made aware of when analyzing and comparing cash flow statements of a U.S.-based firm with an overseas company.?
Understanding the Balance Sheet
Analyzing the cash flow statement is extremely valuable because it provides a reconciliation of the beginning and ending cash on the balance sheet. This analysis is difficult for most publicly traded companies because of the thousands of line items that can go into financial statements, but the theory is important to understand.
One of the better places to observe the changes in the financing section from cash flow is in the consolidated statement of equity. Here are the 2011 numbers from Covanta Holding Corporation:
The common stock repurchase of $88 million is broken down into a paid-in capital and accumulated earnings reduction, as well as a $1 million decrease in treasury stock. In Covanta’s balance sheet, the treasury stock balance declined by $1 million, demonstrating the interplay of all major financial statements.?
To summarize other linkages between a firm’s balance sheet and cash flow from financing activities, changes in long-term debt can be found on the balance sheet, as well as notes to the financial statements. Dividends paid can be calculated from taking the beginning balance of retained earnings from the balance sheet, adding net income, and subtracting out the ending value of retained earnings on the balance sheet. This equals dividends paid during the year, which is found on the cash flow statement under financing activities.
What to Look For
An investor wants to closely analyze how much and how often a company raises capital and the sources of the capital. For instance, a company relying heavily on outside investors for large, frequent cash infusions could have an issue if capital markets seize up, as they did during the credit crisis in 2007.