Why cash flow from investing activities is important

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Cash flow from investing activities

In the last part in the series, we discussed National Oilwell Varco’s (NOV) cash flow from operations (or CFO). CFO reflects a company’s ability to generate cash.

In this part of the series, we’ll discuss NOV’s cash flow from investing activities (or CFI). We say “from,” but items under this type of cash flow are usually negative. It implies expenditure.

NOV - P9

Types of CFI

CFI mainly includes capital expenditures (or capex) that a company makes towards growing its business. It also includes a company’s asset acquisitions. Occasionally, a company may sell some of its assets. In this case, it shows up as a positive number. It’s a cash source.

Capex

Over the last seven years, NOV has been steadily increasing its capex. There were a few slow years after the financial crisis. This was an encouraging sign. It means that the company has been investing towards growth.

It’s important to note that NOV’s distribution business that it spun off in May as DistributionNOW (DNOW), saw the sharpest increase in capex in the period under review. The Rig Technology division saw the largest absolute dollar increase in capex.

Other investments

The large investments displayed as “Other Investing Activities” in the table above are actually NOV’s business acquisitions. See Part 5 in this series to learn how these acquisitions impact NOV’s balance sheet.

Acquiring businesses is a good way for a company to obtain technologies and grow revenues—if it’s done well and at reasonable prices. We’ll have to wait and see if NOV’s large acquisitions in 2012 and 2013 are successful.

In the short term, it’s more important to see if acquisitions strain a company’s liquidity and balance sheet. We’ll discuss these metrics later.

In the next part of the series, we’ll discuss NOV’s cash flows from financing activities. It’s a buffer that “bridges” its operating and investing activities.

Key peers and exchange-traded funds (or ETFs)

NOV operates in the oil and gas service and equipment industry. It’s tracked by the VanEck Vectors Oil Services ETF (OIH). OIH also counts NOVs key peers—Schlumberger (SLB) and Weatherford International (WFT)—among its top holdings.

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