Cash Flow from Operations

Cash flow is an important prognosticator for holders of the company's stocks and bonds because cash is needed to invest for future growth, to pay dividends to stockholders, and to pay interest and other liabilities to prevent bankruptcy. The cash flow of a business is the total amount of cash actually received in a given period minus the total amount of cash actually paid out in that same period. Positive cash flow is the receipt of more cash than was paid out; negative cash flow results from paying out more cash than receiving. Earnings potential is the ability of a company to earn a positive cash flow now and in the future, which is a significant factor in its stock price.

Cash Flow = Cash Received - Cash Paid

In accrual accounting, which most companies use, income is listed when it is earned, even before it is actually received, and expenses are recorded before the money is actually paid out. Depreciation or amortization, for instance, is an expense that doesn't require the immediate payout of cash. Thus, net income alone, which is the income after all expenses are subtracted from all income in a given time period is not an accurate representation of how much cash a company has, or even how much it is generating. So cash flow, which is also sometimes called cash earnings, can also be found by adding back noncash expenses to net income:

Cash Flow = Net Income + Depreciation + Other Noncash Expenses

A company's cash flow—which details all changes affecting cash from operations, financing, and investments—can be found in its annual reports, under Statement of Cash Flows, or Sources and Applications of Funds Statement.

New

Price/Cash Flow from Operations as a Better Metric for Divining Future Stock Prices

Smartmoney.com: Sturm's Screen: My Favorite Metric

This article discusses a new screening financial ratio — Price/Cash Flow from Operations, and also discusses accounting accrual as a means of prognosticating future stock performance. This article also had a list of stocks that were picked, stock prices were from 3/5/2004. I looked at current prices of some of the stocks. Many did go up, although a few went down. The ones that really went up were energy companies—no surprise there. Still, this metric does make a lot of sense.