Investing basics. Discussion on cash flow from investing activities

In the >previous article of this series , we had taken a look at one of the components of cash flow statement - cash flow from operations. In this article, we shall discuss one of the other components of the cash flow statement - cash flow from investing activities.

Cash flow from investing activities

As per Account Standard 3 (or AS3), "Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents."

Cash transactions used for acquiring assets which help in generation of future income fall under this category. This disclosure is quite necessary for an investor. This is because it gives an idea as to how much expenditure has been made towards acquiring resources intended for future income generation.

The amount of money received from sale of such investments is recorded here as well.

Payments towards acquiring fixed assets fall under this category. This also includes intangible assets. In fact, this would probably be the most common entry found under this head. Costs on capitalised research and development and self-constructed assets would also fall under this category.

Further, cash receipts and payments towards acquiring or selling shares of others enterprises need to be shown here as well. These include investments in shares and also acquisition and investments in subsidiaries and joint ventures. Instruments such as warrants and debt instruments of other enterprises are included here.

It must be noted that instruments considered as cash equivalents or even those held for dealing or trading purposes should not be a part this head.

A company needs to record the income - in the form of interest and dividends - that is derived from such instruments as well. However, their classification depends on the business of the company. For a financial enterprise, this would be routine activity. As such it would be recorded as a cash flow from operations. However, such income for a non-financial company would fall under cash flow from investing activities. At the same time, interest payments (outflow) would be classified as cash flows from financing activities.

Let us take up an example to understand this well. Shown in this article is the 'cash flow from investing activities' portion of Bharti Airtel's FY09 cash flow statement.

As you can see, there are some figures which are in brackets. This indicates that the money is going out of the company. On the other hand, the amounts which are not in brackets indicate the inflow of money. It must be noted that the figures in the above image are in Rs '000 (thousand).

As such, during FY09, Bharti Airtel invested about Rs 137 bn on fixed assets. The same figure during the previous year stood at Rs 13,600 crore. Further, during FY09 Bharti Airtel purchased investments of about Rs 39,400 crore. During the same year, it sold investment worth about Rs 42,100 crore.

The other transactions can be viewed in a similar manner. On adding up all the figures, the total comes up to about Rs 15,200 crore. This means that Bharti Airtel invested Rs 15,200 crore in items that fall under the category of 'investing activities'.

In many cases, companies may have negative overall cash flow during a particular period. However, on looking at the numbers in detail, one may notice that this may be the case despite a positive cash generation at the operating level. In such cases it is likely that the overall cash flow position is negative on the back of higher investments. This may not particularly be a bad news for the company.

In the next article of this series, we will look at the third component of the cash flow statement, cash flow from financing activities.

This article is authored by >Equitymaster.com , India’s leading independent equity research initiative

Disclaimer: The opinions expressed by Equitymaster are theirs alone and do not reflect the opinions of The Hindu Business Line or any employee thereof. The Hindu Business Line is not responsible for the accuracy of any of the information within the article.

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