Cash flow from investing activities

Key takeaways

• Cash flow from investing activities is a section of a company's cash flow statement showing the cash generated or spent relating to investment activities.
• Investing activities include purchases of long-term assets (such as property, plant, and equipment), acquisitions of other businesses, and investments in marketable securities (stocks and bonds).
• Negative cash flow from investing activities may not be a bad sign if management is investing in the long-term health of the company.
• Investing activities do not include interest payments or dividends, debt, equity or other forms of financing, depreciation of capital assets (even though the purchase of these assets is part of investing), and all income and expenses related to normal business operations.

What is cash flow from investing activities?

Cash flow from investing activities is the section of a company’s cash flow statement that displays how much money has been used in (or generated from) making investments during a specific time period. It includes purchases of long-term assets, acquisitions of other businesses, and investments in marketable securities.

Understanding cash flow from investing activities

The balance sheet provides an overview of a company's assets, liabilities, and owner's equity as of a specific date. The income statement provides an overview of company revenues and expenses during a period. The cash flow statement bridges the gap between the income statement and the balance sheet by showing how much cash is generated or spent on operating, investing, and financing activities for a specific period.

What are investing activities in accounting?

Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Examples include buying or selling long-term assets, acquisitions of other businesses, and investments in marketable securities.

What do investing activities not include?

Investing activities do not include interest payments, dividends, debt, equity, or other forms of financing, and all income and expenses related to normal business operations.

Calculating cash flow from investing activities

To calculate the cash flow from investing activities, the sum of long-term asset purchases, acquisitions, and investments in marketable securities should be added together, and any proceeds from sales of assets should be subtracted.

For example, if a company spent:

• £30 billion on capital expenditures
• £5 billion in investments
• £1 billion on acquisitions

And received:

• £3 billion from the sale of investments

The annual figure for cash flow from investing activities would be -£33 billion.

The importance of cash flow from investing activities

Cash flow from investing activities is significant as it demonstrates how a company is investing cash for the long-term growth of the business.

Negative cash flow from investing activities may be required in the short-term to invest in fixed assets such as property, plant, and equipment that generate positive cash flow in the long-term.

Investing in short-term marketable securities is another option for companies to enhance profit.