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AAII Stock Ideas
While most investors focus on earnings to measure profitability and company success, it can be insightful to see if cash flow generation corresponds with earnings. Earnings are calculated under the principles of accrual accounting, while cash flow measures the direct consumption and generation of cash.
An accrual is any recorded amount that isn’t a cash transaction, including accounts receivable, accounts payable, allowances and reserves. So, earnings are influenced by these factors even if no cash was used or created in the process.
The cash flow statement divides the uses and sources of cash into three primary segments—operating, investing and financing cash flows. The operating segment measures cash generation and usage from day-to-day operations.
The investing section captures investment and divesture in the long-term capital of the firm, while the financing segment examines how the company finances its capital (equity and debt) and how it rewards its shareholders through dividend payments. (Visit the lessons on financial statements on AAII.com for further information: www.aaii.com/classroom).
Professor Richard Sloan examined the cash and non-cash component (accruals) of earnings to measure the quality of earnings and the impact on future stock prices. Sloan found that companies in which non-cash accruals strongly increased earnings (positive accruals) underperformed the companies in which cash flow exceeded earnings (negative accruals).
Sloan’s testing was focused on adjusting balance sheet assets and liabilities to measure accruals, but a similar analysis can be accomplished by directly comparing net income to elements from the cash flow statement. We calculate an accrual ratio by subtracting the sum of cash from operations and cash from investing from net income and dividing the result by the average total assets over the last year.
The First Cut screen started with domestic, exchange-listed stocks with a minimum price of $5.00 per share. Financial stocks were excluded because their operating and investing cash flow segments are not comparable to other types of firms. Stocks were required to have cash flow from operations greater than net income for the most recent 12 months.
The First Cut stocks also had to have positive net income for the most recent 12 months. As a screen for financial strength, the passing stocks have a long-term debt-to-equity ratio of less than 50%. The price-to-cash-from-operations and the price-to-earnings ratios provide a feel for the valuation levels of these stocks. The 20 stocks with the lowest accrual ratio made the First Cut.
Stocks With Operating Cash Exceeding Net Income Ranked by Accrual Ratio
| Company (Ticker) | Accrual Ratio (%) | Net Income TTM ($ Mil) | Cash From Opers TTM ($ Mil) | Cash From Investing TTM ($ Mil) | Avg Total Assets TTM ($ Mil) | Lt Debt to Equity (%) | Price to Cash From Opers (X) |
P/E Ratio (X) |
Share Price (3/17) ($) |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Industry | ||||||||||
| Forestar Group Inc. (FOR) | (51.5) | 48.2 | 66.9 | 420.7 | 852.7 | 19.7 | 8.0 | 8.3 | 12.80 | Construction Services |
| The Ultimate Software Group (ULTI) | (37.2) | 30.3 | 159.5 | 358.2 | 1,309.1 | 0.9 | 36.2 | 196.2 | 194.65 | Software & Programming |
| Maui Land & Pineapple Co. (MLP) | (27.6) | 21.8 | 33.9 | (0.3) | 42.8 | 38.6 | 6.3 | 9.7 | 11.20 | Real Estate Operations |
| Chipotle Mexican Grill, Inc. (CMG) | (27.5) | 22.9 | 349.2 | 326.8 | 2,375.6 | 0.0 | 33.2 | 499.8 | 402.58 | Restaurants |
| Empire Resources Inc. (ERS) | (27.2) | 3.0 | 68.3 | (2.6) | 230.9 | 9.5 | 0.7 | 19.1 | 5.71 | Chemical Manufacturing |
| Argan, Inc. (AGX) | (25.5) | 56.7 | 245.0 | (70.5) | 462.1 | 0.0 | 4.2 | 18.1 | 67.20 | Construction Services |
| Louisiana-Pacific Corp. (LPX) | (22.8) | 149.8 | 342.3 | 286.3 | 2,103.8 | 31.3 | 10.4 | 23.9 | 24.70 | Construction - Supplies and Fixtures |
| LogMeIn Inc. (LOGM) | (21.6) | 2.6 | 92.3 | 7.5 | 449.5 | 15.3 | 55.8 | 995.2 | 97.95 | Software & Programming |
| Anworth Mortgage Asset Corp. (ANH) | (17.6) | 15.9 | 80.6 | 994.0 | 6,016.1 | 6.5 | 6.6 | 36.6 | 5.54 | Real Estate Operations |
| Corcept Therapeutics Inc. (CORT) | (16.7) | 8.1 | 18.4 | (0.2) | 60.4 | 0.0 | 60.8 | 143.3 | 9.90 | Biotechnology & Drugs |
| RMR Group Inc. (RMR) | (16.7) | 43.6 | 108.8 | (2.8) | 374.4 | 0.0 | 14.9 | 19.1 | 52.00 | Real Estate Operations |
| F5 Networks, Inc. (FFIV) | (15.7) | 370.4 | 697.0 | 43.1 | 2,356.6 | 0.0 | 13.8 | 26.8 | 148.79 | Computer Networks |
| iRobot Corporation (IRBT) | (15.3) | 41.9 | 116.4 | 4.2 | 514.8 | 0.0 | 13.9 | 39.7 | 59.46 | Appliances & Tools |
| RELM Wireless Corporation (RWC) | (14.9) | 2.7 | 10.7 | (1.9) | 41.0 | 0.0 | 6.6 | 26.2 | 5.10 | Communications Equipment |
| Broadwind Energy Inc. (BWEN) | (13.4) | 0.3 | 18.0 | (2.5) | 113.8 | 5.3 | 5.2 | 69.6 | 6.26 | Misc. Capital Goods |
| Photronics, Inc. (PLAB) | (13.2) | 27.1 | 110.3 | 49.5 | 1,005.5 | 8.5 | 6.9 | 28.8 | 11.10 | Semiconductors |
| IMPAC Mortgage Holdings (IMH) | (13.1) | 46.7 | 65.5 | 641.9 | 5,037.3 | 44.2 | 3.1 | 4.2 | 12.85 | Real Estate Operations |
| Coach Inc (COH) | (13.0) | 511.1 | 776.7 | 335.5 | 4,641.2 | 21.0 | 14.4 | 21.9 | 39.74 | Apparel/Accessories |
| Crown Crafts, Inc. (CRWS) | (12.9) | 6.2 | 13.4 | (0.2) | 54.3 | 0.0 | 5.9 | 12.9 | 7.90 | Furniture & Fixtures |
| Masimo Corporation (MASI) | (12.8) | 300.7 | 416.8 | (25.1) | 711.1 | 0.0 | 11.3 | 16.7 | 93.22 | Medical Equipment & Supplies |
| Source: AAII’s Stock Investor Pro, Thomson Reuters. Data as of 3/17/2017. | ||||||||||
Criteria for Stock Investor Pro Users
|
|
Field: | Operator: | Factor: | Compare to: |
|---|---|---|---|---|
| ADR/ADS Stock | Is False | |||
| And | Exchange | Not Equal | Over the counter | |
| And | Sector | Not Equal | Financial | |
| And | Price | > | 5 | |
| And | Net income 12m | > | 0 | |
| And | Cash from operations 12m | > | Net income 12m | |
| And | Sloan Accrual Ratio | < | 0 | |
| And | LT Debt/equity Q1 | < | 50 | |
|
Custom Fields |
||||
| Sloan Accrual Ratio: | (([Net income 12m]-[Cash from operations 12m]-[Cash from investing 12m])/([Total assets Q1]*.5+[Total assets Q5]*.5))*100 | |||
| Average Total Assets (for Display only) | [Total assets Q1]*.5+[Total assets Q5]*.5 | |||
Related
Financial Statements
The Cash Flow Statement: Tracing the Sources and Uses of Cash
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AAII Stock Ideas
The King of Value: Screening for Low Price-to-Free-Cash-Flow
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