Cash Flow from Financing Activities

Investing activities tell what a firm does with cash to increase or decrease fixed assets and assets not directly related to operations.

Financing activities tell where a firm has obtained capital in the form of cash to fund the business.

Source of cash for financing: Proceeds from the:

• sale of company shares or
• sale of bonds (long-term debt).

Use of cash for financing: If a company:

• pays off a bond issue,
• pays a dividend, or
• buys back its own stock.

A consistent cash flow from financing activities indicates excessive dependence on credit or equity markets. Typically, this figure oscillates between negative and positive.

A big positive spike reflects a big bond issue or stock sale. In such a case, check to see whether the resulting cash is used:

• for investments in the business (probably okay) or
• to make up for a shortfall in operating cash flow (probably not okay), or,
• if the generated cash flows straight to the cash balance, you should wonder why a company is selling shares or debt just to increase cash, although often the reasons are difficult to know. Perhaps an acquisition?
  

An illustration:

Company X's statement shows a happy story for investors:

• $15.4 m paid to investors as dividends
• $8.2 m paid out in "Sale Purchase of Stock" (- this is most likely for a share buyback. In fact, the company X actually repurchased $17.2 million in its own stock on the market; then issued $8.9 million in stock, most likely for employee stock options ESOS, and compensation.)

Still, this isn't bad - shareholders benefited from both the dividend and the repurchase.

Bottom line: Company X is using surplus cash generated from operations to give something back to shareholders. That's a good thing.