Understanding a company’s financial health requires careful analysis of its cash flow data. While most pay attention to the operating cash flows, that is, money a company generates from its core operations, cash flow from investing activities is no less important. It provides information on how well a company spends money on growth rather than short-term liquidity.
In this blog, we will discuss what cash flow from investing activities represents, its importance, how to calculate it using the formula, and provide a practical example. In other words, this blog would help you understand what cash flow from investing activities really is.
What Is Cash Flow From Investing Activities?
Cash flow from investing activities is the portion of a company’s cash flow statement that deals with purchases and sales of physical and financial investments. These include:
- Acquisition or disposal of tangible assets such as buildings, machinery, and land (also called capital expenditures)
- Acquisition or disposition of investment securities
- Loans lent to/borrowed from third parties
- It shows how much a business has either spent (or received) in cash from long-run project or asset purchases.
Investing activities, in terms of finance, this also means the efforts of an investment entity to expand its asset base and its infrastructure. It indicates if the company is undertaking an aggressive expansion, cash conservation, or earning from divestment.
Importance of Investing Activities Cash Flow
This section of the cash flow statement plays a critical role in financial analysis because:
- Free Cash Flow from Investing Activities: A negative cash flow from investing activities usually indicates that the company is investing heavily in its future — a good thing unless it is not being financed sustainably.
- Asset Utilisation: reflects the efficiency with which management is using the firm’s assets and resources.
- Liquidity: Investors and other stakeholders can assess whether the firm is able to maintain its investments without negatively impacting its cash position.
- Strategic on the Move: It shows the strategic focus of the firm, i.e., growth, recast, or contraction.
Read More: What Is Discounted Cash Flow (DCF) & How to Calculate It
Details of Cash Flow From Investing Activities
Knowing what fills this section makes it easier to decipher the larger view of a business. These are the most common ones:
Capital Expenditures (CapEx)
These are funds that a company uses to buy or invest in physical assets such as buildings, technology, or machinery. It’s generally an out-flow from a cash point of view, too.
For example: New Manufacturing Equipment Purchase = -$500,000 and will appear in this section as highlighted in red.
Investment Buy / Sell
That is, buying or selling stocks, bonds or subsidiaries. Purchasing investments is a cash outflow, while selling investments is an investment cash inflow.
Proceeds From Asset Sales
A firm receives cash inflow when it disposes of property, plant, or equipment. This could indicate asset reallocation or rationalisation.
Loans Made or Received
If a company makes a loan to a person or business (for example, a supplier or affiliate), it is cash outlay. Payments received on such loans are counted as cash inflows.
Example of Cash Flow From Investing Activities
Let’s walk through an example of how a company might record its investing activities.
Investing Activities Cash Flow Formula:
Cash Flow from Investing Activities = Cash inflows from investing − Cash outflows from investing
Expanded Formula:
CFIA = Proceeds from sale of assets + Proceeds from sale of investments + Loan repayments received − Capital expenditures − Purchase of investments − Loans made
It’s important to remember that this section usually has a net negative value, especially in growth-oriented firms — but this isn’t inherently bad if funded properly.
Cash Inflow vs. Cash Outflow in Investing Activities
Understanding investment cash inflow versus outflow is important for long-term financial planning:
Investment Cash Inflow Includes:
- Sale of fixed assets
- Sale of business units or equity holdings
- Receipt of loans or advances previously issued
Investment Cash Outflow Includes:
- Purchase of long-term assets or capital expenditures
- Acquisition of new companies or subsidiaries
- Lending or issuing advances
Interpreting Positive and Negative Cash Flow from Investing Activities
Negative Investing Cash Flow
- Indicates investment in long-term assets.
- Common in growth-stage companies.
- Acceptable if matched by operating cash inflows or financing sources.
- May raise a flag if the company is borrowing heavily without positive operating results.
Positive Investing Cash Flow
- Could mean the company is liquidating assets.
- May indicate strategic retrenchment or cash conservation.
- Positive signal if paired with consistent operating growth and reduced CapEx requirements.
- Caution: Repeated asset sales could be a warning sign of liquidity issues.
How It Is Used By Investors and Analysts
To gain an insight on the following questions, investors pay close attention to cash flow from investing activities:
- If it is reinvesting its profits into the company to grow.
- If the business is liquidating assets to satisfy operating or debt covenants.
- Matching long-term investments with a company’s strategy
- External financing may be needed to fund Capital Expenditure intensive plans.
Along with the operating and financing cash flows, the investing flows complete the picture of a company balanced in its utilisation, generation, and preservation of cash.
4 Ways to Enhance Investing Activities Cash Flow
If you are running a business and want this area of your business to thrive and live up to strategy, treat it as such:
- Apply ROI Before Significant Capital Expenditure: Some investments have little return. Focus on those asset purchases that will have the most impact
- Lease vs. Buy Analysis: In some cases, leasing the equipment may increase the burden on cash outflows in the immediate term.
- Divesting strategically: Dispose of low turnover assets to increase investment money inflow.
- Keep Capital Expenditure Debt Minimal: Avoid raising all of your Capital Expenditure through debt. Ensure a proper mix of cash from operations and outside funds.
- Automation and Modernisation: Repair and Rebuild through tech investments that lower future costs of operation.
Final Thoughts
Cash flow from investing activities provides priceless insight into a firm’s philosophy and direction of its investments. To an investor seeking sustainable businesses, a CFO strategising capital allocation, or a student of finance, this part of the cash flow statement can eventually lead to the analysis, strategy and decisions that follow.
A company that is making capital investments for the future is a good sign that it is building for the future as opposed to reacting to financial distress, and these aspects can be determined based on capital expenditures, divestiture, and investment cash flow activity.
Become familiar with the cash flow formula for investing activities; monitor your cash flows regularly; evaluate trends within the context of broader operational and financing results — and that’s your route to smarter strategic and tactical financial analysis and planning.
Frequently Asked Questions (FAQ)
What is cash flow from investing activities?
Cash flow from investing activities is the section of a company’s cash flow statement representing cash made from, or used in, investments in long-term assets such as property, equipment, or securities. It helps investors to see how a company is using its resources to grow in the future.
How is cash flow from investing activities calculated?
You can calculate it using the following investing activities cash flow formula. Cash Flow from Investing Activities = Total Cash Inflows from Investing – Total Cash Outflows from Investing. For instance, add up the proceeds from sale of assets or investments and the returns from investments then subtract the cost of money spent on say an asset purchase or other investment, or the loans disbursed.
What is included in cash flow from investing activities?
Common items in the category include:
- Capital expenditures like payments for machinery or other assets
- Investment cash inflow from sale of items like assets or sub-divisions or from the sale of investments
- Where firms have invested in another company cash from the purchase or sale of profitable subsidiaries, joint ventures, or associates
- Any purchase or sale of a business including any associated goodwill
- Loan disbursement versus repayments.
Is negative cash flow from investing activities bad?
Not necessarily, as in this case, that may simply indicate a business which is making great investments for the future. However, if the flow remains negative for a long time without commensurately matched growth or operational cash flow, that could be a problem.
How does investing activities cash flow impact on Financial Analysis?
This category of analysis shows whether a business is growing, consolidating, or divesting. Analysts can use this to understand a company’s long-term strategy, whether it is allocating its capital well and what its likelihood is of being able to self-fund these investments as opposed to relying on debt.
