Investing Guide: Cash Flow Statements Explained — How to Analyse Investing Activities Like a Professional

A cash flow statement is divided into three sections: operating activities, investing activities, and financing activities. According to FCA guide to reading financial statements, while operating activities show how much cash a business generates from its day-to-day operations, the investing activities section captures cash flows related to longer-term asset purchases and sales.

Under both UK GAAP (FRS 102) and International Financial Reporting Standards (IFRS) — which all companies listed on the London Stock Exchange's main market must follow — the investing activities section typically includes:

• Capital expenditure (capex): Cash spent on property, plant, and equipment. For a company like National Grid, this could be billions spent on electricity transmission infrastructure. For a retailer like Tesco, it might be new stores or warehouse automation.
• Acquisitions: Cash paid to buy other businesses, net of any cash acquired. When AstraZeneca acquired Alexion Therapeutics, the cash outflow appeared here.
• Disposals: Proceeds from selling subsidiaries, divisions, or significant assets. When Unilever sold its tea business (Ekaterra), the cash inflow was recorded under investing activities.
• Purchases and sales of investments: This includes buying or selling stakes in other companies, joint ventures, or financial investments such as government bonds or corporate debt securities.
• Loans to other parties: Cash lent to associates, joint ventures, or third parties (and repayments received).

A key principle to remember: cash flowing out for asset purchases appears as a negative figure, while cash flowing in from disposals appears as a positive figure. A company with large negative investing cash flows is not necessarily in trouble — it may be investing heavily for future growth. For more on analysing investments as a UK investor, see our dedicated guide.

For UK retail investors — whether you are investing through a Stocks and Shares ISA with a £20,000 annual allowance or building a SIPP for retirement — the investing activities section answers questions that the income statement cannot.

First, it reveals maintenance versus growth spending. A company might report strong earnings, but if its capital expenditure barely covers depreciation, it is essentially running down its asset base. This is particularly relevant for UK infrastructure and utility companies, where regulators (Ofgem, Ofwat) set spending requirements. A water company reporting rising profits while underspending on infrastructure — as Thames Water controversially did — is a red flag that the investing activities section would have highlighted years before the crisis became public.

Second, it shows acquisition strategy and discipline. FTSE 100 companies collectively spent over £80 billion on acquisitions in 2024. Not all acquisitions create value — in fact, academic research consistently shows that the majority destroy shareholder value. By tracking acquisition spending relative to operating cash flow over several years, you can identify serial acquirers who may be overpaying for growth.

Third, it highlights asset recycling. Many well-run companies regularly sell underperforming assets and reinvest the proceeds in higher-return opportunities. This is a hallmark of disciplined capital allocation. Look for companies where disposal proceeds are reinvested at returns above their weighted average cost of capital (WACC).

Here is a practical framework for analysing the investing activities section of any UK-listed company's cash flow statement. (Source: GOV.UK Companies House filings.)

Step 1: Compare capex to depreciation. Pull the capital expenditure figure from investing activities and compare it to the depreciation and amortisation charge from the income statement (or the operating activities section, where it is added back). If capex consistently exceeds depreciation, the company is growing its asset base. If capex is below depreciation, the company may be underinvesting. For capital-intensive FTSE 100 companies like BP, Shell, or BT Group, this ratio is critical.

Step 2: Calculate free cash flow. Free cash flow (FCF) is operating cash flow minus capital expenditure. This is the cash available for dividends, debt repayment, buybacks, or acquisitions. UK income investors — who often rely on FTSE 100 dividend yields averaging around 3.5-4% — should verify that dividends are covered by FCF, not just reported earnings. A company paying dividends from borrowings rather than free cash flow is unsustainable.

Step 3: Track acquisition patterns. Look at acquisition spending over three to five years. Is the company making one large transformative deal, or a series of smaller bolt-on acquisitions? Bolt-on acquisitions at reasonable multiples tend to create more value than large, premium-priced deals. Check whether goodwill on the balance sheet is growing — rising goodwill often means the company is paying above book value for acquisitions.

Step 4: Assess disposal activity. Significant disposal proceeds can flatter free cash flow in a given year. Strip these out to see the underlying investment pattern. A company regularly selling assets to fund dividends may be in managed decline.

Step 5: Look at the trend. One year's investing cash flow tells you little. Look at three to five years to see whether the company is in an investment phase (large negative investing cash flows), a harvesting phase (reducing capex, selling assets), or steady state. For more on understanding company valuations, see our dedicated guide.

The investing activities section can also alert you to potential problems that glossy annual report narratives might obscure.

Capitalising costs that should be expensed. Some companies shift operating costs into the investing section by capitalising items like software development, customer acquisition costs, or maintenance spending. Under IFRS, the rules around capitalisation are principles-based, giving management significant discretion. If a company's capex-to-revenue ratio is significantly higher than its peers, investigate why. This was a key issue in the Carillion collapse — the outsourcer capitalised costs aggressively, flattering operating cash flow while reality told a different story in the investing section.

Acquisition goodwill write-downs. If a company makes a large acquisition that later requires a goodwill impairment, this does not show up in the investing activities section (impairments are non-cash charges on the income statement). However, the original cash outflow was real. Always trace large acquisition outflows forward to see whether the acquired business delivered the expected returns.

Lease accounting under IFRS 16. Since 2019, most leases appear on the balance sheet rather than as operating expenses. The cash payments for these leases now appear partly in operating activities (interest) and partly in financing activities (principal repayment). This means operating cash flow looks higher than it would have under the old rules, but the investing activities section is largely unaffected. Be aware of this when comparing pre-2019 and post-2019 cash flow statements.

Related-party transactions. Check whether any investing activities involve transactions with directors, major shareholders, or related entities. These should be disclosed in the notes to the accounts. Unusual related-party investments can be a governance red flag.

Understanding the investing activities section gives UK investors a significant edge, particularly in the current economic environment. According to MoneyHelper guide to investing, with UK gilt yields around 4.45% and the Bank of England expected to cut rates further in 2026, the distinction between companies investing wisely and those squandering cash has never been more important.

For ISA investors building long-term portfolios, focus on companies where investing cash flows indicate disciplined capital allocation. Look for businesses where return on invested capital (ROIC) consistently exceeds their WACC — a sign that every pound invested in capex or acquisitions is generating value. Companies like Ashtead Group, Halma, and RELX have historically demonstrated this discipline.

For SIPP investors with longer time horizons, the investing activities section can help identify companies in early-stage investment cycles. A company spending heavily on capex today — resulting in depressed free cash flow and possibly a lower share price — may be building the infrastructure for significantly higher cash flows in five to ten years. UK renewable energy companies and data centre operators are good examples of this dynamic.

For income investors, cross-referencing dividends with free cash flow (operating cash flow minus capex from the investing section) is non-negotiable. A company can maintain dividends above FCF for a year or two by drawing on reserves or borrowing, but this is unsustainable. The investing activities section gives you the capex figure you need to make this calculation.

Finally, remember that UK-listed companies report under IFRS, which requires a specific format for the cash flow statement (IAS 7). This means the investing activities section is broadly comparable across all LSE-listed companies, making peer comparison straightforward. Use the Companies House website or your broker's research tools to access annual reports — every UK public company must file these within six months of their year end.

This article is for informational purposes only and does not constitute regulated financial advice. The value of investments can go down as well as up, and you may get back less than you invest. For personalised advice, consult a qualified financial adviser.. For more on choosing a platform for share dealing, see our dedicated guide. For more on holding investments in a Stocks and Shares ISA, see our dedicated guide.