$$ Investing and Money Glossary, terms and definitions.

Cash Flow

Net income minus preferred dividends plus depreciation (as given in the income statement). Generally speaking, cash flow is the best measure of a company's profits, and is usually calculated by adding depreciation and any other non-cash charges to earnings after taxes. Investors look to cash flow for several reasons: because firms have accounting leeway when it comes to reporting net income; because depreciation charges, while substantial in many industries, aren't genuine bills that have to be paid; and because cash flow is the key to a company's ability to pay dividends, cover debts and so forth. Thus, some analysts focus on the ratio of price to cash flow rather than the traditional price/earnings (P/E) measure. Cash flow is especially useful in assessing firms in capital intensive industries -- cable TV, for instance -- in which huge depreciation charges can hide healthy profits.