sec-cash-flow-review

# SEC Cash Flow Review

Extract and analyze cash flow trends and working capital changes from SEC filings for public companies using the Octagon MCP server.

## Prerequisites

Ensure Octagon MCP is configured in your AI agent (Cursor, Claude Desktop, Windsurf, etc.). See [references/mcp-setup.md](references/mcp-setup.md) for installation instructions.

## Workflow

### 1. Identify Analysis Parameters

Determine the following before querying:
- **Ticker**: Stock symbol (e.g., AAPL, MSFT, GOOGL)
- **Filing Type** (optional): 10-K (annual) or 10-Q (quarterly)
- **Focus Area** (optional): Operating, investing, financing, working capital

### 2. Execute Query via Octagon MCP

Use the `octagon-agent` tool with a natural language prompt:

```
Extract and analyze cash flow trends and working capital changes from <TICKER>'s latest 10-Q.
```

**MCP Call Format:**

```json
{
  "server": "octagon-mcp",
  "toolName": "octagon-agent",
  "arguments": {
    "prompt": "Extract and analyze cash flow trends and working capital changes from NFLX's latest 10-Q."
  }
}
```

### 3. Expected Output

The agent returns structured cash flow analysis including:

**Cash Flow Trends:**
- Operating Cash Flow: Increased 37.87% YoY
- Investing Cash Flow: -$2.08B (CapEx, investments)
- Financing Cash Flow: Mixed ($1.04B inflow, -$2.18B outflow)

**Working Capital Changes:**
- Change in Working Capital: -$456M
- Cash and Equivalents: Decreased $1.193B in 6 months

**Key Observations:**
- Operating cash flow growth outpaces investing/financing
- Working capital contraction from content investments
- Liquidity sufficient for 12+ months

**Data Sources**: octagon-financials-agent, octagon-sec-agent, octagon-web-search-agent

### 4. Interpret Results

See [references/interpreting-results.md](references/interpreting-results.md) for guidance on:
- Understanding cash flow components
- Evaluating cash flow quality
- Analyzing working capital trends
- Assessing liquidity position

## Example Queries

**Full Cash Flow Analysis:**
```
Extract and analyze cash flow trends and working capital changes from NFLX's latest 10-Q.
```

**Free Cash Flow Focus:**
```
Calculate and analyze free cash flow trends for AAPL over the last 4 quarters.
```

**Working Capital Deep Dive:**
```
Analyze working capital changes and cash conversion cycle for AMZN from the latest 10-K.
```

**Liquidity Assessment:**
```
Evaluate TSLA's liquidity position and cash runway from the latest quarterly filing.
```

**CapEx Analysis:**
```
Extract capital expenditure trends and investment priorities from GOOGL's cash flow statement.
```

**Financing Activities:**
```
Analyze debt repayments, share buybacks, and dividend payments from MSFT's latest 10-K cash flow.
```

## Cash Flow Statement Components

### Operating Activities

| Component | Description |
|-----------|-------------|
| Net Income | Starting point |
| Depreciation/Amortization | Non-cash add-back |
| Stock Compensation | Non-cash expense |
| Deferred Taxes | Timing differences |
| Working Capital Changes | Current asset/liability changes |
| Other Adjustments | Non-cash items |

### Investing Activities

| Component | Description |
|-----------|-------------|
| Capital Expenditures | Property, equipment purchases |
| Acquisitions | Business combinations |
| Investment Purchases | Securities bought |
| Investment Sales | Securities sold |
| Asset Dispositions | Property, equipment sales |

### Financing Activities

| Component | Description |
|-----------|-------------|
| Debt Issuance | Borrowings |
| Debt Repayment | Principal payments |
| Share Issuance | Stock offerings |
| Share Repurchases | Buybacks |
| Dividends | Shareholder distributions |

## Key Cash Flow Metrics

### Profitability vs. Cash

| Metric | Calculation | What It Shows |
|--------|-------------|---------------|
| Operating Cash Flow | From statement | Cash from operations |
| Free Cash Flow | OCF - CapEx | Cash after investment |
| FCF Margin | FCF / Revenue | Cash generation rate |
| Cash Conversion | OCF / Net Income | Earnings quality |

### Liquidity Metrics

| Metric | Calculation | What It Shows |
|--------|-------------|---------------|
| Cash Position | Cash + equivalents | Available liquidity |
| Cash Runway | Cash / Monthly Burn | Months of runway |
| Quick Ratio | (Cash + Receivables) / Current Liabilities | Short-term coverage |
| Current Ratio | Current Assets / Current Liabilities | Working capital |

### Investment Metrics

| Metric | Calculation | What It Shows |
|--------|-------------|---------------|
| CapEx Intensity | CapEx / Revenue | Investment level |
| CapEx / D&A | CapEx / Depreciation | Maintenance vs. growth |
| Acquisition Spend | From investing | M&A activity |
| Investment Returns | Sales / Purchases | Portfolio activity |

## Working Capital Analysis

### Components

| Component | Increase Means | Decrease Means |
|-----------|----------------|----------------|
| Accounts Receivable | Cash used | Cash provided |
| Inventory | Cash used | Cash provided |
| Prepaid Expenses | Cash used | Cash provided |
| Accounts Payable | Cash provided | Cash used |
| Accrued Liabilities | Cash provided | Cash used |
| Deferred Revenue | Cash provided | Cash used |

### Cash Conversion Cycle

| Metric | Calculation |
|--------|-------------|
| Days Sales Outstanding | (AR / Revenue) × 365 |
| Days Inventory Outstanding | (Inventory / COGS) × 365 |
| Days Payables Outstanding | (AP / COGS) × 365 |
| Cash Conversion Cycle | DSO + DIO - DPO |

### Working Capital Trends

| Trend | Interpretation |
|-------|----------------|
| Declining CCC | Improved efficiency |
| Rising CCC | Cash tied up longer |
| Negative CCC | Customer-funded model |
| Stable CCC | Consistent operations |

## Cash Flow Quality Assessment

### Quality Indicators

| Factor | High Quality | Low Quality |
|--------|-------------|-------------|
| OCF vs. Net Income | OCF > NI | OCF < NI |
| Sustainability | Recurring sources | One-time items |
| Working Capital | Stable trends | Erratic changes |
| Non-Cash Charges | Reasonable D&A | Excessive add-backs |

### Red Flags

1. **OCF < Net Income persistently** - Earnings quality concern
2. **Negative FCF** - Cash consumption
3. **Rising receivables** - Collection issues
4. **Inventory buildup** - Demand weakness
5. **Declining payables** - Supplier pressure
6. **Heavy stock compensation** - Dilution concern

## Trend Analysis

### Period-over-Period

| Metric | Prior Period | Current | Change |
|--------|--------------|---------|--------|
| Operating CF | | | |
| Investing CF | | | |
| Financing CF | | | |
| Free Cash Flow | | | |
| Working Capital | | | |

### Multi-Year Trends

Track over time:
- OCF growth trajectory
- FCF conversion rate
- Working capital efficiency
- CapEx patterns
- Capital return trends

## Liquidity Assessment

### Cash Position Analysis

| Factor | Assessment |
|--------|------------|
| Absolute Level | Adequate for operations |
| Trend | Growing or declining |
| vs. Obligations | Coverage of debt, commitments |
| vs. Investment | Ability to fund growth |

### Runway Calculation

| Scenario | Calculation |
|----------|-------------|
| Conservative | Cash / Average Monthly Burn |
| Including Revolver | (Cash + Available Credit) / Burn |
| Stress | Cash / Peak Monthly Burn |

### Covenant Considerations

| Factor | What to Check |
|--------|---------------|
| Debt/EBITDA | Leverage limits |
| Interest Coverage | Payment ability |
| Minimum Cash | Required balances |
| CapEx Limits | Investment constraints |

## Financing Activity Analysis

### Capital Structure Changes

| Activity | Implication |
|----------|-------------|
| Debt Issuance | Leverage increase |
| Debt Repayment | Deleveraging |
| Equity Issuance | Dilution, capital raise |
| Buybacks | Return to shareholders |
| Dividends | Cash distribution |

### Capital Allocation Assessment

| Priority | What It Signals |
|----------|-----------------|
| Heavy CapEx | Growth investment |
| Heavy Buybacks | Mature, returning cash |
| Debt Focus | Deleveraging priority |
| M&A | External growth |
| Balanced | Diversified approach |

## Analysis Tips

1. **Compare OCF to earnings**: Divergence signals quality issues.

2. **Track FCF trends**: More important than net income.

3. **Analyze working capital drivers**: Understand component changes.

4. **Consider seasonality**: Quarterly patterns affect cash flow.

5. **Read footnotes**: Capital commitments disclosed there.

6. **Check management discussion**: Cash flow commentary in MD&A.

## Use Cases

- **Investment analysis**: Assess cash generation quality
- **Credit analysis**: Evaluate debt service capability
- **Valuation**: FCF-based models
- **Liquidity monitoring**: Track cash position
- **Working capital efficiency**: Operational assessment