It is often said that “cash is king” in business. Thus, a company’s ability to generate cash can be very telling when measuring its health. Accordingly, investors should pay close attention to the “cash flow” line (sometimes referred to as the “Value Line”) on the Value Line page.
We define cash flow as the total of net income plus non-cash charges (depreciation, amortization, and depletion) minus preferred dividends. It is an indicator of a company’s internal cash-generating ability. This figure is often expressed on a per-share basis, which takes the aforementioned number and divides it by all the common stock outstanding. Cash flow per share is found on the Value Line page near the top of the annual statistical array. Investors should watch for a rising (falling) trend, which would indicate a company’s operations are strengthening (weakening). A company that is producing an increasing amount of cash will have more funds to reward stockholders with share buybacks or dividend increases. What’s more, a strong trend in cash flow is often an indicator of a business that has an established market position and is liquid. Additionally, long-term earnings growth is not sustainable without an upward trend in cash flow.
On the Value Line page, we chart cash flow across the years that are listed in the annual statistical array. We multiply cash flow per share by a multiple that is consistent with a company’s cash-generating capabilities. The resulting cash flow points are connected by a solid line in the graph section of the Value Line page. When creating a cash flow multiple for the “cash flow” line, analysts try to make it consistent with the equity’s historical price performance, as well as its 3- to 5-year Target Price Range. Note that some stocks may trade above or below their historical price performance. Therefore, investors should look for stock with a price that deviates from the historical trend in the “Value Line” when evaluating this indicator. If a stock is quoted below (above) its “cash flow” line, it may be trading at an attractive (unattractive) price. However, investors should not evaluate a stock by this measure alone – it is simply a good way to determine a company’s ability to generate cash.