This section of the cash flow statement shows the amount of cash firms 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.
Capital Expenditures. This figure represents the amount of cash a company spent on items that last a long time, such as property, plant, and equipment (PP&E). Basically, capital expenditures--often referred to as "capex"--are brick-and-mortar types of investments that are necessary to keep the company running and growing in its current form. For example, in order for a supermarket to keep operating and growing, it will typically need to remodel its existing stores, replace its equipment, and build new stores. These expenditures will show up in the capex line item in the "cash flows from investing activities" section.
One of the most important terms and figures you should become familiar with is free cash flow. Free cash flow is calculated as net cash from operating activities minus capital expenditures. This figure represents the amount of excess cash a company generated, which can be used to enrich shareholders or invest in new opportunities for the business without hurting the existing operations. We can't emphasize enough that this figure--free cash flow--is one of the most important foundations in determining a company's ability to enrich its shareholders.
Cash Used for Acquisitions. The acquisitions line item refers to how much cash a company paid to acquire another. Because companies tend to overpay for acquisitions, it's a good idea to keep an eye on this line item to see how much cash a company is spending on acquisitions. This line item will also give you a good sense of how much of a company's growth is coming from internal sources versus acquisitions.
Cash Flows from Financing Activities >>