Picking Stocks Using Free Cash Flow Analysis
Preparing for a class I used to teach at University of California, Irvine, I became hip to the accounting gimmicks that allow public corporations to appear to be more sucessful than they may really be. In fact, one of the reasons my clients avoided slaughter in the Tech Wreck of 2000-2002 was my focus not on reported earnings, but on “free cash flow”, which is reported both quarterly and annually, by law, in a corporations Statement of Cash Flows.
The Cash Flow Statement strips out many accounting adjustments and reveals a track record of a company’s ability to generate actual profits, in the form of cash, to stakeholders. It is an revealing document that I focus upon when analysing candidates for purchase (or sale).
Just today I found a most useful article published by Motley Fool (hate the name, but find them a valuable resource) revealing ways to drill down into the Statement of Cash Flows so as to know when the quality of cash flows may be less than stellar. Even if you don’t plan to be a do-it-yourself investor, this article may help you to understand one of the key criteria I use in screening for and choosing stocks.
Here’s a link to the article- enjoy!