Why cash flows are important
A company’s income statement shows a smoothed-over view of a company’s performance, by including non-cash items such as depreciation. A balance sheet too has shortcomings, in that it provides the state of a company’s assets and liabilities only at a given date. It also includes non-cash assets such as goodwill.
These things make drawing conclusions about a company’s health a little difficult.
A company’s cash flows, however, are far more straightforward—they reflect actual cash transactions for a period under review.
Cash flow from operations (or CFO)
As the name suggests, a company’s CFO is the cash it earns from its business operations—the sale of products and services. It’s clearly one of the most powerful indicators of a company’s profitability.
Though the pace of growth has slowed of late, Southwestern Energy Company’s (SWN) CFO grew steadily over the last seven years. In 2013, SWN generated more than three times as much CFO as it did in 2007.
This cash is a very useful thing for a company, because it gives it the ability to invest in future growth projects, or reward shareholders, without having to look for capital from external sources. Seeking external financing is more prevalent in the case of rapidly growing companies such as SWN. Indeed, these companies often raise cash from other sources, such as debt or additional issue of shares, to fund expansions that cost more than what CFOs provide.
In the next part of this series, we’ll review SWN’s cash flow from investments (or CFI), a major destination for a company’s cash, and occasionally, a source of cash. After that, we’ll look at SWN’s cash flow from financing (or CFF), the major source of a company’s external funding.
Key peers and ETFs
SWN is a component of the Energy Select Sector SPDR ETF (XLE). This ETF also counts major American energy companies Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), and ConocoPhillips (COP) among its top five holdings.