The cash flow statement explains how a company’s cash position actually moved over a period, and it reconciles the beginning cash balance to the ending cash balance. It is organized around the idea that cash comes from running the business, from investing decisions, and from financing decisions, which makes it a bridge between the income statement (performance measured with accrual accounting) and the balance sheet (stocks of assets and liabilities at a point in time). For an investor, it is where you check whether reported earnings are turning into cash on a repeatable basis, what portion of that cash is being reinvested back into the business versus deployed into acquisitions or investments, and whether shareholder returns are funded by genuine cash generation or by incremental leverage.
Unlike the income statement, which mixes cash and non-cash accounting effects, the cash flow statement forces every story to end in a cash number. Still, interpretation matters: operating cash includes working-capital movements and some items that can be timing-driven; investing cash can be lumpy because of capex, acquisitions, or security purchases/sales; financing cash tells you whether the enterprise is structurally issuing or retiring debt and equity. Read it as a “sources and uses” map of capital allocation and liquidity, and keep in mind that it must tie back to the change in cash (including restricted cash, when presented).
As an example of a complete cash flow statement, the following table presents Berkshire Hathaway’s figures for 2024, as reported in its official Form 10-K filing:
| Amount (MUSD) | |
|---|---|
| Cash flows from operating activities | |
| Net earnings (loss) | 89,561 |
| Investment (gains) losses | (52,799) |
| Depreciation and amortization | 12,855 |
| Discount accretion on investments, principally U.S. Treasury Bills | (11,349) |
| Other | (892) |
| Changes in operating assets and liabilities: | |
| Unpaid losses and loss adjustment expenses | 2,173 |
| Deferred charges – retroactive reinsurance | 698 |
| Unearned premiums | 376 |
| Receivables and originated loans | 626 |
| Inventories | 591 |
| Other assets | (797) |
| Other liabilities | (2,288) |
| Income taxes | (8,163) |
| Net cash flows from operating activities | 30,592 |
| Cash flows from investing activities | |
| Purchases of equity securities | (9,237) |
| Sales of equity securities | 143,359 |
| Purchases of U.S. Treasury Bills and fixed maturity securities | (526,842) |
| Sales of U.S. Treasury Bills and fixed maturity securities | 48,462 |
| Redemptions and maturities of U.S. Treasury Bills and fixed maturity securities | 353,538 |
| Acquisitions of businesses, net of cash acquired | (396) |
| Purchases of property, plant and equipment and equipment held for lease | (18,976) |
| Other | (195) |
| Net cash flows from investing activities | (10,287) |
| Cash flows from financing activities | |
| Proceeds from borrowings of insurance and other businesses | 5,528 |
| Repayments of borrowings of insurance and other businesses | (7,796) |
| Proceeds from borrowings of railroad, utilities and energy businesses | 7,658 |
| Repayments of borrowings of railroad, utilities and energy businesses | (4,151) |
| Changes in short-term borrowings, net | (3,059) |
| Acquisitions of treasury stock | (2,918) |
| Other, principally transactions with noncontrolling interests | (5,622) |
| Net cash flows from financing activities | (10,360) |
| Effects of foreign currency exchange rate changes | (212) |
| Increase (decrease) in cash and cash equivalents and restricted cash | 9,733 |
| Cash and cash equivalents and restricted cash at the beginning of the year* | 38,643 |
| Cash and cash equivalents and restricted cash at the end of the year* | 48,376 |
| Cash and cash equivalents and restricted cash at the end of the year: | |
| Insurance and Other | 44,333 |
| Railroad, Utilities and Energy | 3,396 |
| Restricted cash included in other assets | 647 |
| Total | 48,376 |
The cash flow statement has three main sections: operating activities, investing activities and financing activities.
Operating activities are the cash consequences of running the business. This section starts from reported earnings and then walks us back to the cash the enterprise actually generated (or consumed) through its normal operations during the period. For a value investor, it is the first checkpoint in the entire reporting set: if a business cannot reliably convert its economics into operating cash, the rest of the statements become harder to trust, and any valuation based on “owner earnings” or free cash flow becomes fragile.
The statement usually begins with net income, but we should treat that number as a starting hypothesis rather than an answer. Net income is built under accrual accounting, which is designed to match revenues and expenses to the period, not to track cash. Our job is to see how much of that accrual profit is backed by cash, and what portion is driven by timing, estimates, or non-cash accounting entries.
Step one is to separate “profit” from “cash” by identifying non-cash items embedded in earnings. Depreciation and amortization are the classic examples: they reduce accounting earnings today, but they are not cash outflows today. A capital-intensive business will often show large depreciation add-backs, yet that does not mean the cash is “free”; it usually signals that cash was spent earlier (capex) and is now being recognized gradually as an expense. The investor’s instinct here is to ask whether depreciation is a reasonable proxy for the ongoing maintenance spending required to keep the business competitive, or whether it is understating the true economic reinvestment needs.
Step two is to isolate gains and losses that do not belong to the operating engine, especially for conglomerates or firms with large investment portfolios. Investment gains can inflate net income without producing operating cash, and losses can depress earnings even when operations are fine. When those are present, operating cash flow becomes a cleaner lens on the underlying businesses, because it is less exposed to mark-to-market noise. The discipline is simple: we want operating cash to reflect customers, pricing, costs, and efficiency, not the mood of markets.
Step three is to examine working capital as the main bridge between accrual earnings and cash reality. Working capital adjustments capture timing and bargaining power: receivables tell us whether revenue is turning into cash quickly; inventories tell us whether production and sales are aligned or whether cash is getting trapped on shelves; payables and accrued liabilities tell us how the company manages payment terms with suppliers and employees. For value investors, working capital is not just plumbing. It is a window into the quality of revenue, the resilience of the business model, and management’s ability to run the enterprise without continually needing outside financing.
Step four is to look for persistence, not perfection. In any single year, operating cash flow can be pushed around by tax payments, one-off settlements, temporary inventory builds, or a deliberate change in credit terms. What matters is whether, over a cycle, operating cash flow is consistently positive and broadly tracks the firm’s earning power. A company that repeatedly reports strong earnings but chronically weak operating cash is forcing us to ask uncomfortable questions about revenue recognition, margin sustainability, or hidden reinvestment needs.
Step five is to translate operating cash into “cash available to owners,” but with humility. Operating cash flow is not yet free cash flow; it does not subtract capital expenditures needed to maintain and grow the business. Still, it is the essential raw material. If operating cash is robust, we can proceed to ask how much of it must be reinvested versus how much can be distributed through buybacks, dividends, or debt reduction. If operating cash is weak or unstable, everything downstream becomes a debate about financing rather than value creation.
If we keep this step-by-step process, operating activities become the section where we decide whether the business is genuinely cash-generative, whether accounting earnings are high-quality, and whether the enterprise has the internal capacity to compound without leaning on external capital.
Investing activities are the cash flows tied to building, maintaining, and reshaping the asset base of the enterprise. If operating activities tell us whether the business produces cash from its day to day economics, investing activities tell us what management does with that cash and what additional cash it commits in order to secure future earnings power. For a value investor, this section is where capital allocation stops being a slogan and becomes an audited record.
We read this section by separating “economic reinvestment” from “portfolio reshuffling.” Some investing cash flows expand or sustain the productive capacity of the core business, such as purchases of property, plant and equipment. Others reflect changes in what the company owns, such as acquisitions or the purchase and sale of securities. The same line item can mean radically different things depending on the business model, so the goal is to classify each major cash use into whether it is required to keep the business healthy, chosen to grow it, or chosen to redeploy surplus cash into new assets.
The first step is to anchor on capital expenditures and ask what portion is maintenance versus growth. The cash flow statement rarely labels this cleanly, so we infer it by combining multiple pieces of evidence: the stability of the business, the age and competitiveness of its assets, the long-run relationship between depreciation and capex, and management’s commentary. When a firm persistently spends well above depreciation, we should not automatically praise it as “investing for the future.” It might be building durable capacity, or it might be paying a hidden toll just to keep up with competition. When capex runs consistently below depreciation, we should not automatically celebrate “asset light efficiency.” It might be genuine, or it might be underinvestment that borrows from the future.
The second step is to treat acquisitions as a capital allocation claim that must earn its keep. Cash paid for acquisitions is often lumpy and can dominate a single year’s investing section, which is why we should evaluate it over several years and with a business owner’s mindset. We want to know what was bought, why it was bought, and whether it is likely to produce incremental owner earnings at attractive returns, without relying on optimistic synergy narratives. A disciplined acquirer will show a pattern: repeatable criteria, reasonable pricing, and evidence that acquired earnings translate into cash.
The third step is to interpret purchases and sales of securities as a separate layer, especially for firms that run large investment portfolios. For those companies, investing activities can be dominated by security purchases, sales, and maturities that function more like liquidity management than like operating reinvestment. In that case, we focus less on the gross volumes and more on the intent and constraints: what portion is short-duration cash management, what portion is long-duration compounding capital, and whether portfolio moves are funding core needs or simply reallocating surplus. A company that must regularly sell long-term investments to cover operating shortfalls is telling us something very different from a company that redeploys excess cash among liquid instruments.
The fourth step is to translate investing activities into free cash flow with the right boundaries. For many non-financial operating companies, a useful working definition is operating cash flow minus capex, because that approximates the cash that could be distributed to owners without impairing the business. For conglomerates and insurers with large portfolios, we adjust our lens: security purchases and sales can swamp the picture, so we keep capex and acquisitions in view as the “real economy” reinvestment, and we treat the portfolio flows as a financing and allocation layer rather than as a direct operating drain.
The final step is to judge whether the investing behavior matches the company’s stated economics. A wonderful business with high returns on incremental capital should need modest reinvestment for a lot of growth, and we should see that in capex and working capital demands over time. A commodity-like or capital heavy business will require heavier reinvestment, and we should demand evidence that the spending earns acceptable returns through the cycle. In both cases, investing activities reveal management’s temperament: patient compounding, opportunistic bargain hunting, or empire building. That temperament, more than any single year’s number, is what value investors are really underwriting.
Financing activities are the cash flows that show how the company funds itself and how it returns cash to the owners and creditors. If operating activities measure cash earned by the business and investing activities measure cash committed to assets, financing activities record the explicit choices about capital structure: issuing or repaying debt, issuing or repurchasing equity, paying dividends, and other transactions with owners or noncontrolling interests. For a value investor, this section is where we verify whether shareholder-friendly policies are being funded by genuine surplus cash or by quietly increasing financial risk.
We start by treating financing as the “balancing account” of the cash flow statement. After operations and investment needs are met, financing shows what gap remains and how it is filled. When a company has strong operations and modest reinvestment needs, financing often shows debt reduction, dividends, and buybacks. When operations are weak or reinvestment is heavy, financing often shows new borrowing or equity issuance. The same action can be good or bad depending on that context, so we read financing only after we understand the operating and investing sections.
The first step is to map the direction of leverage. Proceeds from borrowings and repayments tell us whether the firm is structurally adding debt or retiring it. What matters is not just a single year’s net change, but the pattern across time and across the business cycle. A company that consistently needs to refinance maturities is normal; a company that persistently grows debt to sustain dividends, fund buybacks, or cover operating shortfalls is transferring value from the future to the present and increasing fragility. For value investors, leverage is acceptable when it is matched to stable cash generation and used conservatively, and it becomes dangerous when it is used to create the appearance of strength.
The second step is to interpret share count decisions with a pricing mindset. Buybacks are not automatically “shareholder friendly.” They are an investment decision: the company is buying a partial claim on its own future cash flows. We want buybacks to be opportunistic, meaning larger when the stock is cheap relative to intrinsic value and smaller when the stock is expensive. If buybacks are steady regardless of valuation, they may still help per-share metrics, but they can also destroy value if done at high prices. Conversely, equity issuance is not automatically bad; it can be rational if the company has unusually high-return opportunities and the equity is priced richly, but it is often a warning when used to fund routine needs.
The third step is to treat dividends as a capital allocation constraint. A dividend can signal confidence and discipline, but it also becomes a recurring promise that management is reluctant to cut. We should ask whether dividends are comfortably covered by normalized free cash flow after necessary reinvestment, not just in a good year but through a full cycle. A dividend that is “covered” only because capex is deferred or because debt is rising is a dividend that is borrowing credibility.
The fourth step is to reconcile financing with per-share value creation. The cash flow statement can show large cash outflows for buybacks and debt repayments, yet the investor’s question is whether intrinsic value per share is increasing. Debt reduction can raise per-share value by lowering risk and interest burden. Buybacks can raise per-share value if the stock is bought below intrinsic value. Dividends can be fine if the company lacks attractive reinvestment opportunities and the cash is genuinely surplus. Financing is value-neutral only when it is consistent with economics; it is value-destructive when it is driven by optics.
The final step is to look for hidden signals of stress or flexibility. Short-term borrowing swings can indicate liquidity management or, if persistent, reliance on short-term funding. Large “other” financing lines often include movements with noncontrolling interests or structured arrangements that deserve attention later. Above all, we want financing decisions that look like what a rational owner would do: protect the balance sheet, avoid forced selling, and allocate capital when and where expected returns are highest.