Hey Lykkers! Let me ask you a simple question: If you had to choose between a friend who brags about their "theoretical wealth" and another who always has cash when needed, who would you trust more with your money?

If you picked the one with actual cash, congratulations - you've just grasped the most important principle in financial analysis. While everyone obsesses over profit numbers, smart investors know that cash tells the real story.

Let me show you why the Statement of Cash Flows is your most reliable guide to understanding any business.

Here's the secret most companies don't highlight: profit and cash are two completely different things. A company can show massive profits on its Income Statement while actually running out of cash. How? Through accounting magic like credit sales that count as revenue immediately (even if the cash hasn't arrived), or by loading up on debt and calling it income.

The Statement of Cash Flows cuts through this illusion. It simply tracks real money moving in and out of the company's bank accounts.

The Three-Part Story of Every Business

The statement breaks down into three crucial sections that reveal everything about how a company operates:

1. Operating Activities: The Heartbeat

This is where you see the cash generated from actual business operations. If this number isn't consistently positive, the company has a fundamental problem - it's not making real money from its core business. Think of it like your salary: no matter how great your job looks on paper, if the paycheck doesn't clear, you've got trouble.

2. Investing Activities: The Growth Engine

Here you'll find cash spent on long-term assets like equipment, buildings, or acquisitions. Negative numbers here usually mean the company is investing in its future - which can be good, but only if those investments pay off in future operating cash flow.

3. Financing Activities: The Lifeline

This section shows how the company raises money - through loans, stock issuance, or paying it back through dividends and buybacks. It reveals whether the company is building value or just shuffling paper.

The Magic Number: Free Cash Flow

The single most important metric you can calculate is Free Cash Flow (FCF). It's simple: take Cash from Operations and subtract essential capital expenditures. This tells you how much cash the business actually has left to grow, pay dividends, or weather storms.

According to McKinsey & Company, in Valuation: Measuring and Managing the Value of Companies, companies in the top third for revenue growth generated total shareholder returns (TSR) that were about 6–8 percentage points higher per year over a ten-year period compared to bottom-third peers — Based on McKinsey On Finance research.

Red Flags Every Investor Should Spot

Watch for these warning signs:

- Consistently negative operating cash flow

- Growing profits but shrinking cash flow

- Using financing activities to fund operations

- Creative accounting that makes cash flow look better than it is

Remember Lykkers, earnings can be dressed up for a quarterly report, but cash doesn't lie. As the famous saying goes, "Revenue is vanity, profit is sanity, cash is reality."

Before you invest in any company, make the Statement of Cash Flows your first stop. Learn to read between the lines, focus on the cash story, and you'll avoid most investment pitfalls while spotting the true gems.

Stay curious, and may your investments always be liquid!