One figure that investors tend to forget when focusing on stocks is cash flow. Most investors zero in on forecast earnings, but cash flow is the real value in the stock. One account that impacts the cash flow statement is the notes receivable account.
The cash flow of a company is found on the cash flow statement. The cash flow statement is divided into three parts: operating, investing and financing. The operating section is where cash flow from the company's day-to-day activities is recorded. The investing section is where the cash flow from capital expenditures, acquisitions and equity stakes is recorded. The financing section is where cash flow from transactions with capital providers, such as share offerings, debt repayment, and dividends, is recorded.
Notes receivable is an account on the balance sheet. It provides information on how much money the company expects to receive from one form of debt investments. Usually, a company that focuses on anything but debt investing should not have a large amount of notes receivable on its books. That is not the company's focus. Notes receivable should be concentrated in companies that are in the business of investing in debt and other securities.
Impact On Cash Flow
An increase in the notes receivable does not necessarily do anything on the cash flow statement unless it is accompanied with a cash outflow due to a credit issuance. A scenario in which a company lends cash in exchange for a note receivable creates a cash outflow on the investing section of the cash flow statement. If a company lends something else or trades products for a note receivable, there is no impact on the cash flow statements.
Focusing your efforts on analyzing the cash flow of a company is one of the best uses of your time in investment research. Because cash is king and the value of a company is the present value of its future cash flows, getting an idea of what kind of cash inflows to expect in the future will significantly help you in the valuation of the company. For most companies, notes receivable are one-time items and will not repeat in the future, so it is best to ignore them or treat them very conservatively when predicting future cash flows.
Alex Shadunsky has a bachelor's degree in finance and is pursuing a Master of Business Administration from Indiana University. He has worked at Briefing.com as a junior equity analyst specializing in health-care stocks.