Some Financial Analysts argue that using cash flow will provide a more accurate picture in determining the fair value of a common stock. What gives? They reason that investors should follow where the cash is. Cash flow will track the flow of cash in and out and this is the reason business exists; to get cash.
Things are not that simple, however. Just as net income, cash flow can be easily manipulated. Cash flow here refers to cash flow from operations found on the statement of cash flow published regularly by publicly traded companies.
Let’s take a look at the statement of cash flow for one publicly traded company, Amazon.com (AMZN) and decipher its components. We will use the statement of cash flow for the year ending on 31 december 2004. Here is the source from Yahoo! Finance: http://finance.yahoo.com/q/cf?s=AMZN&annual
The top part is net income, which is self-explanatory. This is what a company earns during a period of time. For the time period earns $ 588 M. To get into the cash flow figure, we need to add depreciation expense, subtract any increase in accounts receivable and inventory and add any increase in short term liability such as...
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