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Last Sourced: 2021-02-01
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Cash flow analysis
Cash flows are often transformed into measures that give information e.g. on a company’s value and situation:
Cash flow notion is based loosely on cash flow statement accounting standards. The term is flexible and can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows.
Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement:
Business’ financials
The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow for a project is the sum of cash flows that are classified in three areas:
Depreciation*(tax rate) which locates at the end of the formula is called depreciation shield through which we can see that there is a negative relation between depreciation and cash flow.
The sum of the three component above will be the cash flow for a project.
And the cash flow for a company also include three parts:
The sum of the three components above will be the total cash flow of a company.
Further Reading
- Agency costs of free cash flow, corporate finance, and takeovers – www.jstor.org [PDF]
- Investment-cash flow sensitivities are not valid measures of financing constraints – academic.oup.com [PDF]
- Evidence on the role of cash flow for investment – www.sciencedirect.com [PDF]
- Do financing constraints explain why investment is correlated with cash flow? – www.nber.org [PDF]
- Do investment-cash flow sensitivities provide useful measures of financing constraints? – academic.oup.com [PDF]
- Financial development and the cash flow sensitivity of cash – www.jstor.org [PDF]
- Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis – www.sciencedirect.com [PDF]
- Free Cash Flow (FCF), Economic Value Added (EVA™), and Net Present Value (NPV):. A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation – www.tandfonline.com [PDF]
- Dividend announcements: Cash flow signalling vs. free cash flow hypothesis? – www.sciencedirect.com [PDF]
- A comparables approach to measuring cashflow‐at‐risk for non‐financial firms – onlinelibrary.wiley.com [PDF]
