InvestorQ : Are there any specific cues we can pick up from Cash flows from Investing?
Arti Chavan made post

Are there any specific cues we can pick up from Cash flows from Investing?

3 years ago

When we talk in terms of manufacturing companies, investment refers to investments in the core business assets only. We are not referring to investments in shares and debentures which will go under cash flow from financing. This is more of plant and machinery investments. Therefore investment in plant and machinery, expansion of capacity, diversification, and inorganic acquisitions will all be part of the company’s investment activities. All these will be investing outflows. On the other hand, the sale of fixed assets, a sale of business lines or sale of subsidiaries will all be categorized as inflows from the investment activity.

Normally, a healthy company will have negative investment flows because any growing company will have to focus on growing by expanding its assets rather than by selling its assets. For typical software companies, there is very limited by way of investment outflows. Hence most of their positive operating cash flows go directly into enhancing their cash balances. Remember, most of these companies are also zero debt companies. That explains why Indian IT companies sit on such huge cash balances. That is also the reason why you see so many of these software companies rewarding their shareholders with generous buybacks.