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The sum of CFF, CFI and CFO is net cash flow. Although net cash flow is almost impervious to manipulation by management, it is an inferior performance measure because it includes financing cash flows (CFF), which, depending on a company's financing activities, can affect net cash flow in a way that is contradictory to actual operating performance. For example, a profitable company may decide to use its extra cash to retire long-term debt. In this case, a negative CFF for the cash outlay to retire debt could plunge net cash flow to zero even though operating performance is strong. Conversely, a money-losing company can artificially boost net cash flow by issuing a corporate bond or selling stock. In this case, a positive CFF could offset a negative operating cash flow (CFO) even though the company's operations are not performing well.
Now that we have a firm grasp of the structure of natural cash flows and how they are represented/classified, this section will examine which cash flow measures are best used for particular analyses. We will also focus on how you can make adjustments to figures so your analysis isn't distorted by reporting manipulations.
Which Cash Flow Measure Is Best?
You have at least three valid cash flow measures to choose from. Which one is suitable for you depends on your purpose and whether you are trying to value the stock or the whole company.
The easiest choice is to pull cash flow from operations (CFO) directly from the statement of cash flows. This is a popular measure, but it has weaknesses when used in isolation: it excludes capital expenditures--which are typically required to maintain the firm's productive capability--and it can be manipulated, as we show below.
If we are trying to do a valuation or replace an accrual-based earnings measure, the basic question is "which group/entity does cash flow to?" If we want cash flow to
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