Tucked within the statement of cash flows lies a section critical to understanding a company’s strategic investments: cash from investing activities.
It is one of the most insightful yet often overlooked sections of the statement of cash flows. This section reveals how a company allocates its capital and provides a glimpse into its long-term strategy: is it expanding, reinvesting in itself, or selling assets to redirect its focus?
So, what is cash from investing activities, why is it important, what are its main components, and how is it calculated?
Be sure to reinforce your learning with our free quiz at the end!
What is Cash From Investing Activities?
Cash from investing activities (CFI) represents the cash inflows and outflows associated with a company’s investments in long-term assets and other financial instruments. It gives investors insight into how a company uses its cash resources to expand operations, maintain its existing assets or generate returns through financial investments.
Cash from investing activities is the middle section of the statement of cash flows. It is presented after cash from operating activities and before cash from the financing activities.
Why Is It Important?
Cash from investing activities is important to investors because it provides crucial insights into a company’s use of funds for investment purposes.
Here are some reasons why cash from investing activities matters.
Understanding Growth and Expansion
Cash from investing activities reveals how and where a company invests for future growth.
Purchasing property, plant and equipment indicates reinvestment in operational capacity and expansion. In other words, the company is pursuing organic growth (growth from the company itself). Investing in or acquiring entire businesses suggests strategic growth through diversification.
Although growth from acquisitions isn’t organic, once the acquired business is fully integrated, it will aid organic growth.
n.b.
Acquiring companies is beneficial when it’s strategic (when it opens up new market opportunities and growth avenues for the company). Investors should be aware of companies that rely on acquisitions for growth. It indicates the company repeatedly pays for growth (by acquiring companies) instead of growing organically (by improving its product offering or changing its pricing strategy).
Insights into Financial Health
The cash flows in the cash from investing activities sections say a lot about a company’s financial position.
On the one hand, consistent negative cash flows from investing activities suggest that a company is reinvesting for asset maintenance and growth, a good sign for future revenue generation. On the other, recurring cash inflows from selling assets might signal financial distress if the assets were sold to cover liabilities.
Cash inflows from selling business assets aren’t always a bad thing.
Selling business assets can signal improvements in operating efficiency. A company, for example, no longer requires three factories to manufacture its products – two will do the job. This may be due to previous investments in technologies that reduce material wastage and the time to production.
Industry-Specific Analysis
Different industries have unique patterns of investing activities, especially in what is being invested in.
Tech companies spend large amounts on innovation and R&D (research and development). These could be investments in cloud infrastructure, data centres and advanced technologies, like artificial intelligence (AI), that streamline business operations and improve product offerings.
Utility companies frequently invest in infrastructure upgrades, reflecting operational maintenance and expansion. The last thing anyone would like is for their electricity to be cut because the electricity provider forgot to maintain its grid.
Understanding these patterns helps contextualise a company’s cash flows within its industry.
Components and Common Transactions
Cash from investing activities captures all cash inflows and outflows for investment purposes. Below are its primary components, grouped by inflow and outflow.
Cash Outflows
These represent cash spent by the company on investments, whether for long-term growth, business expansion or asset maintenance.
Purchase of Property, Plant and Equipment
- Explanation: Also referred to as capital expenditure (CapEx), this represents the cash used to acquire new assets or upgrade or maintain existing business assets.
- Transaction Example: A manufacturing firm buying new machinery for production.
Acquisitions
- Explanation: This represents the cash paid to purchase another company as a strategic investment, for example, to access new markets.
- Transaction Example: A tech firm acquiring a startup.
Purchases of Intangibles and Other Non-Current Assets
- Explanation: This represents the cash used to acquire intangible assets like licenses, patents, trademarks, and other non-current assets.
- Transaction Example: A firm purchasing software licenses.
Purchases of Financial Investments
- Explanation: This represents the cash used to acquire shares, bonds, options contracts, currency hedges and other derivative instruments.
- Transaction Example: A firm purchasing government bonds.
Cash Inflows
These represent cash received by a company for investment-related activities.
Sale of Property, Plant and Equipment
- Explanation: This represents the cash a company receives from selling physical assets that are no longer needed.
- Transaction Example: A manufacturing firm selling some machinery.
Proceeds from Divestitures
- Explanation: This represents the cash a company receives from selling parts of its business.
- Transaction Example: A conglomerate (a company with several independent businesses) selling a non-core division.
Sale of Financial Assets
- Explanation: This represents the cash received from selling stocks, bonds and other financial investments.
- Transaction Example: A company selling shares to raise cash.
Investment Income
- Explanation: This represents the cash received as dividends and interest from financial investments. This differs from the sale of financial assets because it represents the benefit of owning investment securities like stocks and bonds (the dividends from stocks and the interest from bonds).
- Transaction Example: Interest earned from owning a government bond.
Quick Note
Sometimes, companies group inflows and outflows into a single line item. This may be done to condense the statement of cash flows or because the cash inflow is not large enough (relative to other figures) to warrant a separate line.
For example, a company may group the purchase of property, plant and equipment with the sale of property, plant and equipment because the cash received from the sale is small relative to the purchase.
If a company purchases £100 million of physical assets and only sells £2 million, it would present the two as net purchases of property, plant and equipment of £98 million.
Calculating Cash From Investing Activities
Using the following financial information for Example Industries, here’s an example of calculating a company’s cash from investing activities.
Table 1: Example Industries’ Financial Information
| Investing Activity | £ in millions |
| Purchase of Property, Plant and Equipment | 500,000 |
| Purchase of Financial Assets | 200,000 |
| Acquisitions | 300,000 |
| Sale of Property, Plant and Equipment | 150,000 |
| Sale of Financial Assets | 100,000 |
| Proceeds from Divestitures | 400,000 |
Table 2: Calculating Example Industries’ Cash From Investing Activities
| Investing Activity | Inflow/(Outflow) in £ millions |
| Purchase of Property, Plant and Equipment | (500,000) |
| Sale of Property, Plant and Equipment | 150,000 |
| Purchase of Financial Assets | (200,000) |
| Sale of Financial Assets | 100,000 |
| Acquisitions | (300,000) |
| Proceeds from Divestitures | 400,000 |
| Net Cash From/(Used In) Investing Activities | (350,000) |
Negative net cash from investing activities isn’t necessarily a bad thing…most companies have a negative figure for this section. If the investments are likely to result in increased financial success, investors are all for it.
What would shock most investors is a consistently positive figure for cash from investing activities. It could mean a company didn’t reinvest enough into its business (inflows > outflows). If this were the case, it would have negative long-term implications, such as loss of competitive advantages and market share and, as a result, poor stock price performance.
Summary
Cash from investing activities highlights how a company allocates cash for long-term investments and asset management. It reflects cash inflows and outflows related to acquiring and selling property, equipment, businesses, and financial investments.
This section of the statement of cash flows provides valuable insights into a company’s growth strategy and long-term sustainability.
Common components include outflows like purchases of property, plant, and equipment and inflows from the sale of assets and investments. Calculating this section involves summing all cash flows, with the net figure providing insight into a company’s capital-allocating strategies and financial priorities.
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