A company’s cash flow from investing activities is an important component of its overall cash flow statement. It captures the amount of cash a company spends on investments and capital expenditures to maintain or expand its business operations. Understanding what is included in cash flow from investing activities provides insight into a company’s growth strategy and capital allocation decisions. This article will summarize key information on the major items that are part of cash flow from investing activities.
Investing activities include purchases and sales of long-term assets
The main items included in cash flow from investing activities relate to a company’s investments in long-term, productive assets and investments. This includes purchases and sales of property, plant and equipment; purchases and sales of intangible assets like patents; and purchases and sales of investment securities. Essentially, any purchases or disposals of assets that are not for short-term operating purposes will show up as investing cash flows.
Capital expenditures are a major investing cash outflow
Capital expenditures, or cap ex, represent one of the largest cash outflows under investing activities. These expenditures relate to investments a company makes to upgrade, acquire and maintain physical assets like property, buildings, industrial plants, technology, equipment and machinery. Because cap ex creates assets that have a useful life of more than one year, the cash outlays show up as an investing activity.
Other major cash outflows relate to acquisitions
In addition to cap ex, other major cash outlays under investing activities include cash payments for business acquisitions and purchases of other long-term assets. For example, if Company A buys another company, the cash amount exchanged would show up as cash used for an investing activity. Purchases of intangibles like patents and long-term prepayments also flow through as investing cash outflows.
Divestments and sales generate cash inflows
Not all investing activity cash flows represent cash outflows. When companies divest businesses or sell off long-term assets like property or equipment, the cash proceeds received from those sales are recorded as cash inflows from investing activities. Securities trading can also generate cash inflows if sale proceeds exceed purchase costs.
In summary, a company’s cash flow from investing activities provides insight into management’s allocation decisions related to long-term, productive assets and capital investments to support business growth. Major items include capital expenditures, purchases and sales of property, plant and equipment, acquisitions, intangibles and investments in securities.