What are Investing Activities?
Definition: The cash flow statement of a company provides details of its investing activities. These relate to the increase or decrease in a company’s cash balance as a result of the sale or the purchase of long-term assets such as plant and equipment.
What does Investing Activities mean?
An analysis of a company’s cash flow statement provides details of its cash inflows from operations and investing activities as well as outflows related to its business activities and investments.
Positive cash flows are usually a good sign because they indicate that the firm is generating more cash than it is spending. However, negative cash flow is not always a bad sign. That’s because the company may be investing in long-term assets that will yield benefits for many years into the future.
For example, an organization could spend a significant amount on plant and equipment in a particular year. This “investing activity” could result in the cash flow being negative. But the new equipment could allow the firm to meet the increased demand for its product and provide it with an increasing level of revenues and profits.
However, it’s important to note that if the negative cash flow is the result of operating activities, it is usually a bad sign. A company cannot sustain itself if it continually has negative cash flow from its operating activities.
If a firm is going through difficult times and is incurring losses because of the competition that it faces in the market, it could generate cash by selling some long-term assets. This positive cash flow from its investing activities could give it the time that it needs to return to profitability.
Example of Investing Activities
Here are a few examples of different types of investing activities:
Investing activities that will result in negative cash flow
- Purchase of plant and equipment
- A strategic investment in another company
- Providing a long-term loan
Investing activities that will result in a positive cash flow
- Sale of the company’s land
- Sale of stocks and bonds owned by the company
- Sale of fixed assets
Investing activities result in a change in a company’s long-term assets. Sale of assets leads to positive cash flow while the purchase of assets or other long-term investments depletes a company’s cash balance.