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Looking Beyond Earnings When Evaluating Stocks

by AAII Staff | August 28, 2019

Strategic Value Investing: Screening for Cash Flow and Value

By Robert R. Johnson, Stephen M. Horan and Thomas R. Robinson

As earnings season comes to a close, it’s important to remember to look beyond earnings when it comes to stock evaluation. Now, earnings are nice, but companies cannot pay employees, suppliers, creditors or even executive staff with earnings; payment requires cold hard cash. Ultimately to be of value to the owners, a company must be able to generate positive cash flow.

The article Strategic Value Investing: Screening for Cash Flow and Value presents a screen that uses custom cash flow variables to identify companies selling at reasonable prices relative to strong cash flows. AAII’s Stock Investor Pro fundamental stock screening and research database was used to build the screen. In this article you will find a step-by-step process on how to build a custom screen in SI Pro, analyze results and apply your findings to your own portfolio.

The importance of cash flow can easily be skipped over, especially in earnings season when many are waiting to hear results on earnings per share or net income for the quarter. While other factors are still important when it comes to stock evaluation, we believe that this article offers a unique approach to stock screening. Not all companies with strong cash flows will be winners in your portfolio, however, using such a screening process is a good starting point to narrow the universe of companies down to a number that deserves further attention and due diligence.


Inventory Turnover

By AAII Staff Ratio analysis forms the cornerstone of fundamental stock analysis. However, many investors do not fully understand the importance of these ratios when it comes to analyzing the attractiveness of an investment. This article covers the inventory turnover ratio and how to properly analyze and apply it to your stock screening strategy. The article Inventory Turnover provides a straightforward approach on where to find company-specific inventory ratio information and how ratio analysis can help you sort through misleading information that often surrounds many stocks. Some of the important highlights from the article include: How to use Morningstar.com to locate a company’s inventory ratio data What a high or low inventory turnover ratio means for potential investors The importance of comparing long-term performance, industry trends and market benchmarks to a company’s current inventory turnover ratio How to apply inventory turnover ratio concepts to your analysis of a company’s performance Most people know to look at sales and earnings trends when analyzing a company but looking at inventory turnover and the average days an item spends in inventory can provide a deeper view into the company’s operations. However, inventory analysis is only one part of the broader analysis process. We hope this article will put you in a better position when it comes to analyzing a company. Especially in such volatile times, knowing the difference between company “noise” and actual performance trends can make a world of a difference when it comes to your stock picks. More »

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