Why is Net Cash Flow Important?

Net Cash Flow is important because it tells an investor how much cash a company is generating. After a company creates a product or service and pays all of its bills, the cash flow earnings is the cash the business has available to make money for the shareholders.

Management has three choices for its cash flow earnings (Net Cash Flow); invest for future growth (buildings, equipment, inventory, etc.), pay off debt (reduces future interest expenses and improves the balance sheet), or return money to shareholders (dividends and stock buybacks).

The priorities of these company choices will change over time. But cash flow earnings give an analyst the important metric: the amount of cash generated. The next step is to evaluate the effectiveness of managements decisions. Have past cash flows been reinvested so that cash earnings are growing? Is debt being reduced or managed efficiently? Are earnings being returned to shareholders?

Net Cash Flow is a good metric to compare different companies. It is one of my favorite because it is simple and effective. Its’ best use may be to use in ratios with other metrics.

Related Reading: Types of Cash Flow & Cash Flow Calculations Guide

Enterprise Value (EV) & Calculating Enterprise Value Ratios