Dual Cash Flow Screen
|Dual Cash Flow||S&P 500|
|Five Year Return:||24%||16.6%|
|Ten Year Return:||7.9%||4.7%|
While earnings are still the primary metric used to judge company performance and measure the attractiveness of a company's stock price, a growing wave of investors focus on cash. Cash levels help reveal the financial strength and resources of a company, while cash flow indicates the generation of new cash. Cash flow can reveal whether the company is generating or consuming cash in its normal operation, if it is investing for the future, and whether it is rewarding investors with dividends or seeking additional capital from the equity or debt markets. Cash flow analysis often provides advance notice that a company may be facing financial trouble even though earnings and sales are still looking strong.
We have examined a number of cash and cash flow calculations here in the stock screens area of AAII.com. "Screening for Cash Rich Firms" seeks out companies with high levels of net cash on hand relative to the company's market value. The principle underlying this screen is that the cash can be the ultimate safety net for a firm. With a large cash hoard, a firm should be able to weather an economic storm, undertake expansion, or fund productivity improvements for future growth.
Investors have turned toward cash flow because of its direct relationship to the firm's ability to operate profitably. Earnings and earnings multiples dominate standard measures of firm performance and stock price valuation. However, slight accounting differences make it difficult to track earnings over time or to compare firms. Cash flow avoids many of these problems of comparability across firms and consistency over time.
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