In order to understand the financial position of a company, Indian investors rely upon the information provided by the brokers and the artificial confidence of the broker makes an ordinary person invest their money in the stock market. The unprofessional approach, aiming supernormal profit, and giving false assurance to the clients are to be considered as the basic character traits of an Indian Broker. So-called analysts, who have become stock market analysts due to the unemployment trend in India, represent note or document provided to them by stockbroking houses showing high sales and high

profit of a company to convince the investors to buy stocks of that particular company. With wow! So intelligent feeling, investors blindly follow the so-called analysts' view and make investments. Therefore, personal understanding has no impact on buying any stock. In this same context, investment Guru Warren Buffett cited that “you should never invest in businesses that you don’t fully understand”.


Investment decision making by using the information of cash flow statement






Cash flow statement consists of Cash Flow From Operating Activity, Cash Flow From Investing Activity and Cash Flow From Financing Activity. In the operating activity, the cash profit is presented as deducted by the net increase in the working capital. The Investing activity represents the purchase and sale of trading and non-trading fixed assets. In the final section of the cash flow statement, the inflow of long-term capital and redemption or buyback of long-term capital are presented. A listed company is required to abide by either International Accounting Standard 7 of Indian Accounting Standard 3 (In India only) to prepare the Cash flow statement. 


In order to take a decision on whether to invest in a company or not, you have to make a comparative analysis of cash flows from the above-stated activities. The implication of the activity wise cash flows is discussed below:


1.      Cash flow from the operating activity:


As stated above, operating cash flow represents the cash of the company sourced from the primary operation of the company. A company, which has performed well in the last accounting year, would have generated most of its cash from this activity. A negative cash from operating activity reflects a loss or excessive increase in the working capital, and therefore, companies with negative cash flow are to be rejected while making an investment decision.     


2.      Cash flow from investment activity:


Unlike operation activity, a negative cash flow in the investment activity implies a sound future prospect of a company. If a company is having a negative cash flow from investing activity, it could be the result of investment in non-current assets, which will be used for expanding the business operation. Thus, you may invest in a company, with a negative cash flow.


3.      Cash flow from financing activity:


A positive cash flow from the financing activity represents a capital formation and therefore, it can be considered as a symptom of good financial health. However, if the company forms capital out of debt capital, it would create pressure on the income statement and as a result, the net profit will fall. Thus, positive financial cash flow is not always good for a company. If the cash flow from financing activity decreases over years due to repayment or redemption of debt, the company would have a higher net profit in the future. Hence, if this kind of situation occurs, one should invest in that particular company. Finally, it is to be stated that enhancement in the cash flow from this activity due to the issue of equity capital is to be considered as a reason behind low financial risk for the future.