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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. 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).
What are Investing Activities in Accounting?
Let’s look at an example of what investing activities include. In this section of the cash flow statement, there can be a wide range of items listed and included, so it’s important to know how investing activities are handled in accounting.
Purchase of property plant, and equipment (PP&E), also known as capital expenditures
Proceeds from the sale of PP&E
Acquisitions of other businesses or companies
Proceeds from the sale of other businesses (divestitures)
Purchases of marketable securities (i.e., stocks, bonds, etc.)
Proceeds from the sale of marketable securities
There are more items than just those listed above that can be included, and every company is different. The only sure way to know what’s included is to look at the balance sheet and analyze any differences between non-current assets over the two periods. Any changes in the values of these long-term assets (other than the impact of depreciation) mean there will be investing items to display on the cash flow statement.
Cash Flow from Investing Activities Example
Let’s look at an example using Amazon’s 2017 financial statements. As you can see below, investing activities include five different items, which total to arrive at the net cash provided by (used in) investing. Let’s take a closer look at each of these items for Amazon.
Amazon’s investing activities include:
Outflow: purchase of PP&E including software and website development
Outflow: purchase of marketable securities
Outflow: acquisitions, net of cash acquired
Inflow: proceeds from the sale of property and equipment
Inflow: proceeds from the sale of marketable securities
As you can see in Amazon’s numbers, the main uses of cash for investing have been in purchasing property/equipment/software/websites, acquiring other businesses, and buying marketable securities (stocks and bonds).
It’s also important to point out that the purchase of PP&E (CapEx) has been fairly proportional to depreciation, which indicates the company is consistently reinvesting to keep its assets in good shape.
What Do Investing Activities Not Include?
Now that you have a solid understanding of what’s included, let’s look at what’s not included.
Not included items are:
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)
All income and expenses related to normal business operations
Applications in Financial Modeling
In financial modeling, it’s critical to have a solid understanding of how to build the investing section of the cash flow statement. The main component is usually CapEx, but there can also be acquisitions of other businesses. This section is usually pretty straightforward.
Below are an example and screenshot of what this section looks like in a financial model. Notice how every year the company has “Investments in Property & Equipment,” which are its capital expenditures. There are no acquisitions (“Investments in Businesses”) in any of the years; however, it is there as a placeholder.
Thank you for reading this guide to Investing Activities. To continue learning and progressing your career, these additional CFI resources will be helpful:
There isn't a singular agreed-upon formula, but the following formula is generally accepted: Cash flow from investing activities = CapEx/purchase of non-current assets + marketable securities + business acquisitions - divestitures.
A positive investing cash flow means that a company generates more cash from its investments than it is spending. This can be good or bad, based on how the company uses the extra cash. It can be good if a company reinvests its positive investing cash flow into growth opportunities.
Negative investing cash flow occurs when a company spends more cash on its investing activities than it receives from them. This means that the company is using its cash to buy or improve its fixed assets, such as buildings, machinery, or technology.
Cash inflows (proceeds) from investing activities include:
Cash receipts from collections of loans (except for program loans) and sales of other agencies' debt instruments. Cash receipts from sales of equity instruments and returns from investments in those instruments.
Purchases or sales of assets, loans made to vendors or received from customers, or any payments related to mergers and acquisitions (M&A) are included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.
A good analysis will examine the statement of cash flows in detail and look for the reasons behind the movement, commenting on how the entity has performed. The statement of cash flows contains three sections: cash flows from operating activities, investing activities and financing activities.
Cash flow from investing activities includes any inflows or outflows of cash from a company's long-term investments. The cash flow statement reports the amount of cash and cash equivalents leaving and entering a company. The sections of the cash flow statement are: Cash from operating activities.
A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities. An operating cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities.
The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash activities related to net income. Investing activities include cash activities related to noncurrent assets.
Negative cash flow from investing activities means that a company is investing in capital assets. As the valuation of those assets grows, they increase the net cash flow available to the company over time. So, while investing activities may require short-term expenditures, they represent long-term gains.
Items reported on a cash flow statement for investing activities include purchases of long-term assets such as property, plant, and equipment (PP&E), investments in marketable securities such as stocks and bonds, as well as acquisitions of other businesses (M&A).
In most situations, when you purchase an investment or security, your money can grow in two ways: (1) periodic payments in the form of either dividends (from stocks) or interest (from bonds) and (2) a change in value when you sell the security.
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