Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.


Renowned Economist Paints Startling Portrait of the Future

Renowned Economist Paints Startling Portrait of the FutureRenowned economist Dr. Stephen Leeb has predicted the last 5 major market shifts. And he’s just revealed his latest prediction: “A market meltdown will wipe out the savings of millions of Americans.” In his latest report, he details which stocks will come crashing down in the coming months, as well as a select few that could double or even triple in value over the next few years. Get your copy here.


Cash Is King: Why Cash Flow is More Important than Earnings

By Benjamin Shepherd on May 7, 2012

While many investors focus on a company’s earnings per share (EPS), there are other metrics that may be more indicative of a company’s prospects for growth. That’s because EPS can be easily manipulated and isn’t always an accurate representation of how much cash a business has at its disposal; management can game when certain expenses and revenue are recognized in addition to the myriad other accounting gimmicks that can be employed to artificially inflate EPS. In short, earnings don’t automatically translate into liquidity.

So while EPS remains one of the most popular measures of a company’s performance, it’s not necessarily the best. Companies can produce staggering EPS one quarter and go broke the next—think Enron—but companies that produce consistently high and growing levels of free cash flow (FCF) are unlikely to go bust any time soon. And with some types of securities, such as master limited partnerships (MLP) and real estate investment trusts (REIT), EPS can be completely uninformative because of the unique accounting required for these types of entities.

FCF is a measure of the unencumbered cash a company generates after it meets the necessary expenses of its operations and invests in its future growth. FCF is a key metric because it’s a much more accurate measure of how much cash a business actually has to service debt, pay dividends, invest in its operations or buy back shares.

At the most basic level, FCF can be calculated as operating cash flow minus capital expenditures. For a more fine-tuned measure, add any non-cash adjustments for depreciation and amortization back to net income, and then subtract any change in working capital and capital expenditure to arrive at the correct figure. From there, FCF can be calculated per share by simply dividing FCF by the weighted average of a company’s shares outstanding. All the data necessary to perform these calculations can be found on a company’s balance sheet and income statement.

FCF is an important metric regardless of whether an investor is interested in capital appreciation or income. For growth-oriented investors, companies with high FCF are likely to deploy that excess cash for the capital expenditures necessary to grow their business. And rising levels of FCF are generally an excellent indicator of future earnings gains. For income investors, FCF is a reliable indicator of a company’s ability to maintain its dividend or even increase its payout.

One caveat, however, is that FCF sometimes requires an additional layer of analysis. For example, some companies may consistently generate high FCF, but suddenly suffer a quarter in which FCF is negative. In such cases, an investor should determine whether the drop in FCF was due to cash being directed toward internal investment, which can be a good thing, or a sharp decrease in revenue. If the dip can be explained, it may not be a red flag unless FCF consistently drops over subsequent quarters for no particularly good reason.

Cash flow isn’t always a foolproof investment metric, but companies with high FCF should always have enough cash to pay the bills and grow their business. If nothing else, paying attention to cash flow will help you avoid most bad investments.

You might also enjoy…


Here’s What’s Really Going to Crush the Market

Most folks understand the basic concept of inflation… things cost more money. But tragically, most don’t understand the real implications of what it means for their financial future. 

Or just how dangerous it’s becoming right now. Today.

And there are two reasons for that…

First, the U.S. government’s calculations barely take into account two of the things you and I are paying more and more for every day: energy and food.

Second, since inflation really hasn’t been an issue for the past 30 years here in the U.S., most analysts won’t dare to say it’s on the rise because they’ll suffer professionally. 

But I’ve made a name for myself by always saying what needs to be said. Which is why I’ve prepared a new special report that’ll give you simple instructions on how to protect yourself from the coming storm.

And better still…

It gives you the full story on the six types of investments that are destined to soar 275%… 375%… even up to 575% over the next few years as the winds of inflation flatten the U.S. economy.

You can get your free copy here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.

Stock Talk

  1. avatar
    Richard F. Strauss, Reply May 8, 2012 at 9:23 PM EDT

    Clearest description of FCF I’ve seen, especially the description of the accrual ratio metric.

    • Benjamin Shepherd
      Ben Shepherd Reply May 8, 2012 at 10:03 PM EDT

      Thanks, Richard, I appreciate the comment.