Term of the day
Cash Flow (source: NASDAQ.com Glossary)
In investments, cash flow represents earnings before depreciation, amortization, and non-cash charges. Sometimes called cash earnings. Cash flow from operations (calledfunds from operations by real estate and other investment trusts) is important because it indicates the ability to pay dividends.
Brief Study term Cash Flow
From what I understand, cash flow is different from the broader term earnings in that it is probably a value before certain other cuts or spreading of assets or expenses over a period of time. If I understand correctly cash flow should be greater > earnings in value. What are depreciation and amortization, and what could be an example of non-cash charges?
depreciation (definition 1) -> A method of allocating the cost of a tangible asset over its useful life. (Businesses depreciate long-term assets for both tax and accounting purposes.)
amortization (definition 2) -> The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets (such as a patent or a copyright).
non-cash charges (examples) -> accounting policy changes or significant depreciation in the market value of an asset or inventory.
Ultimately Cash Flow (cash earnings) seems to have more meaning than the broader earnings for investors, in that it probably conveys better the money the company made (hence cash), and thus its ability to pay dividends to shareholders.
Feel free to discuss, agree, disagree or help others understand.
