Today I am fortunate enough to have a whole afternoon in front of the PC catching up with my own investment education and stock analysis and would like to share something from a book I have been reading called ‘ Fire Your Stock Analyst’ by Harry Domash.
In my previous posts I have talked about cash flow and how important it is in determining the prospects of a company. Harry Domash’s book expands on this further by breaking down what type of cash flow to look for and how to use that information. He states that the number to look at is actually the operating cash flow because that strips out receivables and shows you how much the company is actually putting into its bank account. Therefore a company with a high turnover but low operating cash flow tells you that it may not have received, or actually spent more than it earned. The next thing to look at is the company’s working capital. This is simply its total cash and current assets minus its current liabilities. This tells you whether the company is burning through its cash or not. If you take these two numbers and both the show positive, this tells you that the company is generating positive cash flow from its operations, and have enough working capital to pay its bills. There are four it is consistently adding more cash to its pile.
Let’s take a look at an example using JOBS again.
Its operating cashflow for 2005 was 16 million and its net asset liability was 27 million. In 2004 its operating cash flow was 3 million and its net asset liability was 24 million. These positive numbers show that the company is adding to its bank balance and is in no danger of running through its cash reserves.
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