Why is Cash Flow Statement analysis so important?

There are 3 financial statements that public companies file with the SEC: Income Statement, Balance Sheet and Cash Flow Statement. Most investors and investment professionals agree it is important to analyze a company’s financial statements and health (fundamental analysis), but there is a wide range of opinions on which metrics are the best indicators of quality investments.

In today’s world, there is significant pressure on company executives to not only meet, but beat, previous sales and earnings figures. This pressure is created by the market because the ability to generate earnings (profit) plays an important role in stock prices. In response to this, many companies use a strategy called “earnings management” to manipulate the earnings to hit specific targets. This practice helps to smooth out the high and low earnings data to show more consistency. This practice is legal, but may not be accurate.

The practice of “smoothing earnings” is more widespread than ever before. It is vital to look beyond sales and earnings to identify successful investments and avoid the pitfalls of various accounting practices allowed by the Federal Accounting Standards Advisory Board (FASAB). Detailed analysis of the Cash Flow Statement determines the quality of an investment based on a company’s ability to operate their core business in a manner that will increase its value to shareholders. Now more than ever, positive cash flow represents real cash and true profit while earnings do not. We believe earnings are opinions and cash flow numbers are facts. This is why the Cash Flow Statement should be used to validate the quality of earnings.

Cash Flow Statement Analysis Benefits:

• Identify those investments which create the greatest value for investors.
• Reveal the performance of a company’s core operations.
• Validate the quality of a company’s reported earnings.
• Determine if there is free cash flow (cash flow after capital expenditures).
• Verify there is enough free cash flow to pay stock dividends.
• Verify there is enough free cash flow to pay bond interest.
• Verify there is enough free cash flow to pay both dividends and interest.
• Improve communication between advisors and clients.

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There are many types of analysis, but it is the cash flow statement that includes the data necessary to analyze how the core operations of the business are actually performing. This is where an investor can see if the business is producing cash flow based on its operations. The ability to produce a positive cash flow is the fundamental distinction between investment and speculation. This is why we believe cash flow statement analysis should be a part of every investor’s homework.

5 Indicators in the Cash Flow Statement Analysis:

• Earnings Quality
• Free Cash Advantage
• Free Cash for Stock Dividend
• Free Cash for Bond Interest
• Free Cash for Dividend & Interest

All 5 indicators are represented visually and include supporting data charts. Click on the links above to learn more about each indicator.

Investment Ideas

Cash Flow Statement 101 can provide all types of investors with an ongoing source of investment ideas. We provide timely investment ideas that are all characterized by outstanding cash flow metrics. With just a click, you can access investment ideas based on cash flow strength, dividends, corporate bonds, recent SEC filings, industry and market cap. Our Cash Flow, Dividend and Bond Honor Roll lists include the top cash flow companies in the market.

5 Ways to Find Investment Ideas:

• Honor Roll lists:
  • Cash Flow Honor Roll
  • Dividend Honor Roll
  • Bond Honor Roll
• SEC Filings in the Last 7 Days
• Cash Flow Analysis by Industry

Portfolio & Watch List Analysis

Once you have made an investment, it is vitally important to continue to monitor each investment in your portfolio. Cash Flow Statement 101 makes it easy to monitor your portfolio and watch list of potential investments. Simply add the stocks to your portfolio or watch list, and with a single click get a cash flow statement analysis summary for the stocks you have included.

2 Lists Available for Easy Monitoring or Research:

• Portfolio Analysis
• Watch List Analysis

Additional Data & Charts

There are a total of 22 charts of stock data on Cash Flow Statement 101. The following additional data is available on our website and represented visually in those charts.

• Credit Risk:
  • Altman Z Score
  • Springate Score
• Income Statement:
  • Sales (Total Revenue)
  • Earnings (Net Income)
  • Price to Earnings
  • Gross Margin
• Balance Sheet:
  • Accounts Receivable
  • Inventory
  • Current Assets
  • Accounts Payable
  • Current Liabilities
  • Total Liabilities
  • Total Capital
  • Book Value
• Cash Flow Statment:
  • Cash Flow from Operations
  • Free Cash Flow
  • Capital Expenditures
  • Cash Flow from Investing
  • Cash Flow from Financing
  • Price to Cash Flow from Operations
  • Price to Free Cash Flow
  • Cash Flow from Operations Margin
  • Free Cash Flow Margin
  • Accruals
  • Sloan Accruals Ratio

Cash Flow Honor Roll

The Cash Flow Honor Roll is a list of the top cash flow stocks in the market.

Qualifications:

• Positive Free Cash Flow
• Free Cash Flow Greater than Earnings
• Minimum $300 Million Market Cap
• Non-financial, publicly traded U.S. Equity

Learn more about the Cash Flow Honor Roll list.

Dividend Honor Roll

The Dividend Honor Roll is a list of the top cash flow stocks that pay a dividend. To make this list a company must have enough cash flow to pay the shareholders’ dividends.

Qualifications:

• Positive Free Cash Flow
• Cash Flow from Operations Greater than Earnings
• Free Cash Flow Greater than Dividends & Interest Expenses combined
• Minimum 1% Dividend Yield
• Minimum $300 Million Market Cap
• Non-financial, publicly traded U.S. Equity

Learn more about the Dividend Honor Roll list.

Bond Honor Roll

The Bond Honor Roll is a list of the companies that have enough cash flow to cover interest payments to bond holders.

Qualifications:

• Positive Free Cash Flow
• Cash Flow from Operations Greater than Earnings
• Free Cash Flow Greater than Dividends & Interest Expenses combined
• Minimum Altman Z Score of 2.675
• Minimum $300 Million Market Cap
• Non-financial, publicly traded U.S. Equity

Learn more about the Bond Honor Roll list.

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Bunge Limited (BG) does not have sufficient Cash Flow from Operations to validate earnings.

Our research shows that earnings backed by cash flow from operations tend to be more sustainable than non-cash earnings.

Read about the next indicator in our cash flow statement analysis: Free Cash Advantage

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EMC Corporation (EMC) has Free Cash in excess of Earnings, which provides an investment advantage as a "self funding" company.

Read about the next indicator in our cash flow statement analysis: Free Cash for Stock Dividend

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AT&T, Incorporated (T) does not have sufficient Free Cash available to pay stock dividends.

Read about the next indicator in our cash flow statement analysis: Free Cash for Bond Interest

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Dominion Resources, Inc. (D) does not have sufficient Free Cash available to pay interest expense.

Read about the next indicator in our cash flow statement analysis: Free Cash for Dividend and Interest

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General Electric (GE) does not have sufficient Free Cash available to pay both the dividend and interest expense.

Read about getting investment ideas from: Cash Flow Honor Roll

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Qualifications:

• Positive Free Cash Flow
• Free Cash Flow Greater than Earnings
• Minimum $300 Million Market Cap
• Non-financial, publicly traded U.S. Equity

Read about getting investment ideas from: Dividend Honor Roll

Or return to Take the Tour.