Learning with Kabuko: Dividend Investing from Scratch [STEP 63] What is Cash Flow? Let's Look at the Company's Money Flow That Profit Alone Can't Reveal
When choosing high-dividend stocks, it’s easy to think, “If a company is profitable, its dividends are safe,” but in reality, profit alone doesn’t tell you the state of a company’s finances. In this article, we will explain for beginners what cash flow is, the differences between operating, investing, and financing cash flows, and why cash flow is important when looking at high-dividend stocks, using simple, relatable analogies.
📚 For those reading this series for the first time
In this series,
starting from “What are stocks?”, we are learning about dividend investing little by little with Kabuko, who aims to live off dividends by age 60😊
It’s okay to read from STEP 1 in order.
But, “Is it okay if I found this from STEP 63?”
That is also fine🌸
I explain things one by one as simply as possible so that you can understand even if you start in the middle.
So far, we have studied many numbers such as
-
PER
-
PBR
-
ROE
-
Equity Ratio
-
EPS
-
Dividend Payout Ratio
-
Dividend Increase
-
Dividend Yield
.
Starting now, we will take a step further and look at
“the flow of company money.”
We will take a look at.
The first of these is
cash flow
😊
What you will learn in this article
In this article, we will study:
-
What is cash flow?
-
Are “profit” and “cash” different?
-
What is a cash flow statement?
-
Differences between operating, investing, and financing cash flows
-
The relationship between high-dividend stocks and cash flow
-
Why shouldn’t you look only at profit?
-
What would Kabuko check?
about these topics.
1. What is cash flow?
First, the term
“cash flow”
.
In English, it is
Cash Flow
is.
Cash = Cash
Flow = Flow
So,
thinking of it literally,
“flow of money”
is what it is.
It is for seeing
whether money came into
the company,
and whether money went out.
It is for looking at that.
2. “Profit” and “Cash” are not the same
This is the most important point this time.
For example,
suppose a company
sold 1 million yen worth of products.
“Sold 1 million yen!”
If that happens,
it seems like they made a profit, right?
However,
if you have not yet received that 1 million yen,
what happens if you haven’t received it from the customer yet?
Even if it is recorded as sales on the company’s books,
the actual bank account
does not yet have that 1 million yen in it.
In other words,
having a profit and having cash on hand are not necessarily the same thing.
This is one of the reasons to look at cash flow.
3. Let’s compare it to household finances
Since Kabuko is a housewife,
I think it’s easier to understand if we compare it to household finances😊
For example,
this month’s salary is 300,000 yen.
However,
credit card payments are 100,000 yen.
Rent is 80,000 yen.
Food expenses are 50,000 yen.
Utility bills are 30,000 yen.
And other payments are 20,000 yen.
Suppose that was the case.
You have an income of 300,000 yen, but
there is also money that actually goes out, right?
Therefore,
just asking
“How much is your income?”
is not enough to understand the state of your household finances.
Money coming in
and
money going out
both need to be looked at.
The same applies to companies.
4. Dividing a company’s money flow into three parts
A company’s cash flow is broadly divided into three categories.
1. Operating Cash Flow
Money flow from core business operations
2. Investing Cash Flow
Money flow used for the future, such as capital investment
3. Financing Cash Flow
Money flow related to fundraising and returns to shareholders, such as borrowing, repayment, and dividends
is.
The name alone makes it sound difficult, doesn’t it?
Let’s look at it one by one😊
5. (1) Operating Cash Flow
First, let’s look at
operating cash flow
itself.
This is used to see
how much cash the company has generated through its core business.
For example,
in the case of a supermarket,
they sell products and
receive money from customers.
From that,
they pay for inventory costs, labor costs, and so on.
This flow of money from the core business is
reflected in the operating cash flow.
6. What if operating cash flow is positive?
For example,
if it is positive,
Suppose the operating cash flow is
plus 10 billion yen.
This means that
cash is coming into the company
through its core business.
Of course,
this does not mean that
it is absolutely safe if operating CF is positive.
It is also important to look at not just the size of the amount, but also
whether it is consistently positive.
to see.
7. (2) Investing Cash Flow
Next is
investing cash flow.
This is used to
look at
the flow of money resulting from capital investments for the future or the buying and selling of assets held by the company.
For example,
building a new factory.
Buying new machinery.
Increasing the number of stores.
Acquiring a company.
In these cases,
money flows out of the company.
Therefore,
investing cash flow
can sometimes be negative.
8. Is negative investing CF a sign of a bad company?
Be careful here.
For example,
suppose
investing CF
was -10 billion yen.
You might think,
“10 billion yen just flowed out!”
But,
with that money,
they built a new factory.
They introduced new equipment.
You made an investment for growth.
If that is the case,
it is not necessarily a bad thing.
In fact,
it is possible that you are actively investing for future growth.
Therefore,
it is important not to decide whether something is good or bad
based on numbers alone.
9. (3) Financing Cash Flow
The last one is
financing cash flow.
This is
something that looks at
how a company raised money, repaid it, or returned it to shareholders
.
For example,
borrowing money from a bank
↓
money enters the company
↓
Financing CF is in the positive direction.
Conversely,
repaying debt
↓
money leaves the company
↓
Financing CF is in the negative direction.
This is how it works.
And,
dividend payments
are also included in financing cash flow.
10. Let’s summarize the three
Putting what we’ve covered so far into a table,
Cash Flow: What to look at? ImageOperating CF: Core business money: Money earned from core business. Investing CF: Investment money: Money used for equipment and growth. Financing CF: Funding, repayment, and returns: Debt, repayment, dividends, etc.
This is how it looks.
At first,
“Operating, Investing, Financing… I can’t remember these 😵”
you might think.
But,
Operating = Core Business
Investment = for the future
Finance = raising money, paying it back, and returning it to shareholders
Just remember that and you’ll be fine😊
11. For high-dividend stocks, ‘Operating CF’ is of particular interest
So,
what about the
high-dividend stocks
we are aiming for?
What Kabuko wants to pay special attention to is
operating cash flow
.
This is because
in order to pay dividends,
it is important for the company to continuously generate cash.
For example,
every year,
operating CF
+10 billion yen
+12 billion yen
+13 billion yen
+15 billion yen
if it is a company that is stably generating cash from its core business in a form like
this,
You can confirm that “money is coming in from the core business.”
Of course, you cannot judge the safety of dividends based on this alone.
12. Conversely, what if operating CF is negative?
For example,
if operating CF is,
+10 billion yen↓+5 billion yen↓-2 billion yen
what would that mean?
If I were Kabuko, I would be concerned, thinking, “Huh? The money coming in from the core business is decreasing, and it’s even negative at the end…”
Of course,
it doesn’t mean it’s immediately bad just because it’s negative for one year.
There are various reasons, such as the business environment or temporary expenditures.
However,
“Why is it negative?”
is something you would want to check.
13. What if profits are increasing but operating CF is decreasing?
For example,
You can confirm that “money is coming in from the core business.”
Of course, you cannot judge the safety of dividends based on this alone.
12. Conversely, what if operating CF is negative?
For example,
Operating profit
10 billion yen
↓
11 billion yen
↓
12 billion yen
is increasing.
On the other hand,
Operating CF
12 billion yen
↓
10 billion yen
↓
7 billion yen
is decreasing.
If such a case occurs,
as Kabuko,
“Even though profits are increasing, why is the money from the core business decreasing?”
I would wonder.
This leads to the idea of
not judging a company’s condition based on profit alone
.
14. Looking at both “Profit” and “Cash”
So far,
Financial results in STEP 51.
Operating profit margin in STEP 52.
ROE in STEP 53.
Equity ratio in STEP 54.
PER in STEP 55.
PBR in STEP 56.
EPS in STEP 58.
Dividend payout ratio in STEP 59.
Dividend increases in STEP 60.
Dividend yield in STEP 61 and 62.
We have studied these so far.
Now, we will add
cash flow
to this.
In other words,
it means checking not just the profits, but the actual flow of money as well.
That is what it means.
15. The ‘power to generate cash’ is important for high-dividend stocks
If you want to hold high-dividend stocks for the long term,
as Kabuko, I wonder, ‘Will this company be able to continue paying dividends?’
That is what I am concerned about.
Dividends are
a mechanism for a company to return money to its shareholders.
Therefore,
Is the company generating money from its core business?
This perspective
is also important when it comes to dividend investing.
16. However, ‘High Operating CF does not equal OK as a high-dividend stock’
This point is also extremely important.
For example,
Operating CF is 10 billion yen.
Dividend payments are 2 billion yen.
In that case,
at a glance,
relative to the money generated by the core business,
the burden of dividends does not appear to be too large.
On the other hand,
what if it is a company that requires large capital expenditures every year, even though its operating CF is 10 billion yen?
Operating CF alone
does not tell you
‘how much freely usable money there is’.
We will look into this in more detail
from the next installment onwards,
as we continue.
17. Next up is “Free Cash Flow”
For example,
Operating CF is 10 billion yen.
5 billion yen was spent on capital investments and the like.
Then,
roughly speaking,
10 billion yen – 5 billion yen = 5 billion yen
is the general idea.
This way of thinking,
which looks at how much money is left after the company makes necessary investments from the cash generated by its core business,
is called
Free Cash Flow
.
We will study this in more detail
in the next STEP 65 😊
18. There are only “three things” to remember this time
There is no need to memorize the fine details from the start.
First,
Operating CF
👉 Money from core business
Investing CF
👉 Money for future investments
Financing CF
👉 Money from borrowing, repayments, dividends, etc.
Let’s remember these three.
And,
when looking at high-dividend stocks,
have the perspective of,
“Is money actually coming in from the core business?”
Just by doing this,
your perspective on companies will change significantly😊
🌸 Kabuko’s Note
Kabuko used to think,
“If a company is making a profit, are the dividends safe?”
But this time,
I learned that
profit and the actual flow of money are not the same
.
Come to think of it,
even in household finances,
It’s not just about saying, “I earned 300,000 yen this month!”
but also about
“How much came in and how much went out this month?”
It’s the same as looking at that.😊
For companies, too,
profit
is not the only thing to look at; we also look at
cash flow
.
When researching high-dividend stocks from now on,
in addition to “How is the profit?”
“Is it properly generating cash from its core business?”
I would also like to check that.🌸
Today’s Summary
The theme this time was
“Cash Flow”
.
Cash flow is something that looks at
the flow of money in a company
.
There are three main types.
1. Operating Cash Flow
The flow of money from core business operations
2. Investing Cash Flow
The flow of money for the future, such as capital investment
3. Financing Cash Flow
The flow of money related to fundraising and shareholder returns, such as borrowing, repayment, and dividends
These are the three.
And when looking at high-dividend stocks,
“Is it profitable?”
is not the only thing,
“Is it generating cash from its core business?”
is also something we want to check.
This is the most important point this time😊
🌸 The Kabuko Method of Thinking
Starting from this time,
“company profit”
not only,
“company cash”
we will start looking at.
And,
Profit
+
Cash flow
+
Dividends
+
Finance
—we will gradually see the overall picture of the company.
This will lead to
the
STEP 70
“Kabuko-style High Dividend Stock Checklist.”
You don’t need to memorize everything from the start.
It’s fine to understand it
one by one,
“What kind of figure is this looking at?”
as you go along.😊
📚 Related Articles
📊 STEP 51 | What should I look at in financial results? How to read financial statements even for beginners
https://note.com/syominkabuko/n/n698770e0aa82?sub_rt=share_pb
📈 STEP 52 | What is Operating Profit Margin? Can You Understand a Company’s Earning Power by Looking at the “Profit Margin”?
https://note.com/syominkabuko/n/nf20054e1c6cc?sub_rt=share_pb
📈 STEP 53 | What is ROE? How Efficiently Is the Company Using Shareholders’ Money?
https://note.com/syominkabuko/n/nd7bd30b26f87?sub_rt=share_pb
🏦 STEP 54 | What is Equity Ratio? Let’s Check the Company’s “Financial Health”!
https://note.com/syominkabuko/n/n1de91e61ad4b?sub_rt=share_pb
💡 STEP 58 | What is EPS? Can You Understand a Company’s Growth by Looking at Earnings Per Share?
https://note.com/syominkabuko/n/n7608bae164ea?sub_rt=share_pb
💰 STEP 59 | What is Dividend Payout Ratio? Is the Dividend of a High-Dividend Stock Sustainable?
https://note.com/syominkabuko/n/n8a3f6721d818?sub_rt=share_pb
📈 STEP 60 | What is Dividend Growth? How Do You Find Companies That Increase Their Dividends?
https://note.com/syominkabuko/n/n0ff69ef807d5?sub_rt=share_pb
📊 STEP 61 | Which Is More Important, Dividend Yield or Dividend Growth Rate? Let’s Organize How to View High-Dividend Stocks
https://note.com/syominkabuko/n/nc987c94e9d4e?sub_rt=share_pb
📈 STEP 62 | How Do You Calculate the “Dividend Yield” of High-Dividend Stocks? When the Stock Price Changes, the Yield Changes Too!
https://note.com/syominkabuko/n/nae6c447986f3?sub_rt=share_pb
📚 “Learning with Kabuko: Dividend Investing from Scratch”
Up to this point,
dividends
↓
High-Dividend Stocks
↓
NISA
↓
Financial Results
↓
Profit Margin
↓
ROE
↓
Equity Ratio
↓
PER/PBR
↓
EPS
↓
Dividend Payout Ratio
↓
Dividend Increase
↓
Dividend Yield
and have been studying.
Starting from this time,
we will also turn our eyes to
the company’s money flow.
With this,
we have moved from
just looking at profit
to the stage of looking at profit plus money
😊
Although it is little by little,
I feel like Kabuko’s eye for looking at companies is growing too🌸
🔮 Next Episode Preview
Next time,
it will be STEP 64: “What is Operating Cash Flow? Let’s Check if the Company is Making Money from Its Core Business.”
Out of the three types of cash flow introduced this time,
operating cash flow
will be examined in more detail.
“Is it safe if Operating CF is positive?”
“Is it good if it’s positive every year?”
“How do you view a company with increasing Operating CF?”
and more,
how to use Operating CF when choosing high-dividend stocks
will be studied gently using concrete examples😊
Let’s continue to learn step by step with Kabuko next time too🌸
📌 A realistic asset-building blog by a 42-year-old housewife aiming for a “dividend-funded lifestyle by age 60.”
Based on real-life experiences as an investment beginner, I share easy-to-understand information on domestic stocks, dividends, household budget management, and balancing it all with raising children.