Amateurs focus on Profits. Professionals focus on Cash Flo…

The cash flow statement shows cash moving in and out of a company over specific time periods.

Since it's Jan right now, the two most common will be:

■ 3 Quarters
■ 1 Year

Below, we can see CrowdStrike's cash flow over the past 9 months. The time frame is at the top $CRWD

There are three key parts to a cash flow statement:

1️⃣ Operating Activities (Running the business)
2️⃣ Investing Activities (Investing in the business)
3️⃣ Financing Activities (Paying for the business)

There's freedom in how it gets reported, but this is the basic structure

Let's specifically look at operating activities

The top line-item is NET INCOME.

You'd think this would represent the money a company puts in the bank at the end of the year.

But that's NOT THE CASE

Net Income backs out NON-CASH charges. The cash flow statement adds them back in.

Including:

■ Depreciation: Value of asset decreasing
■ Amortization: Expensing pre-paid cost
■ Stock-Based Compensation: Paying employees w/ equity

Next, working capital leads to cash being added or subtracted.

This covers:
■ Accounts Receivable: Sales not yet collected
■ Accounts Payable: Bills not yet paid
■ Inventory: Value of "stuff" not yet sold

When all of those things are accounted for, you get OPERATING CASH FLOW.

The easiest way of thinking about it: this is a company's REAL net income -- on a cash (and not accrual) basis.

The next section is investing activities.

The first line item is very important:
CAPITAL EXPENDITURES

■ Cash spent to acquire or maintain property, plant, buildings, or equipment.
■ Cash spent to develop internally-used software

With these figures, we can now calculate FREE CASH FLOW.

This is the money a company generates from business after paying for capital expenditures.

This is one of the most important financial metrics in my investing framework

Why?

FCF tells a very different story than NET INCOME
Consider $CRWD

📉Net LOSSES in the first 9 months of the past two years have been over $300 million

😟That seems pretty bad

But there are two HUGE caveats:

1️⃣ ~$590 million in stock-based compensation (SBC).

2️⃣ ~$860 million in deferred revenue.

The latter represents fees $CRWD has already collected for service in the future. It's in the bank.

(Note: SBC *does* dilute shareholders)

Incredibly, when you do the math, $CRWD produced:

💰$415 million in Operating Cash Flow in the 2021 time period

💰$668 million in Operating Cash Flow in the 2022 time period

To find Free Cash Flow, we subtract out Capital Expenditures.

When we do, $CRWD Free Cash Flow numbers are:

💰$315 million in the first 9 months of 2021

💰$467 million in the first 9 months of 2022

Think about that.

😟While it's true that $CRWD Net Income LOSSES were over $300M

🤑It's also true that $CRWD Free Cash Flow GAINS were nearly $800M

Knowing that is vitally important with stocks tanking and sources of funding drying up. The company can self-fund if it wants!

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@BrianFeroldi @Brian_Stoffel_ Here's another thread you might be interested in: https://t.co/TQmCltP23L

How to analyze a:

\u25aa\ufe0fBalance Sheet
\u25aa\ufe0fIncome Statement
\u25aa\ufe0fCash Flow Statement

In less than 5 minutes: pic.twitter.com/JseZux2yFJ
— Brian Withers (@StocksWithBrian) December 27, 2022