A company's net income and earnings per share can provide insight into its well being and progress over time. That's why these metrics get the headlines. However, there are times when a company's "bottom line" doesn't tell the whole story.
The problem with looking solely at a company's earnings number is that sometimes earnings are hurt one-time events or depreciation, which can muddy the waters. That's where cash flow comes into play. The cash flow statement simply tracks where the company's money goes and may provide a clearer picture of its health. (For related reading, check out Fundamental Analysis: The Cash Flow Statement and The Essentials Of Cash Flow.)
The Basics of Cash Flow
Cash flow statements are no-nonsense. They depict money outflows and inflows and may be a better measure in determining whether the company has the money to cover the important things like its interest payments on a loan or if it has extra money it can spend on a share repurchase program.
Its also important to note that there are times when a company might currently be losing money in terms of its net income, but generating positive cash flow. Under some conditions such a company may be a good investment candidate. If the earnings do turn positive, other investors may start to take notice and the stock could take off. With all of that in mind, here are some companies that, in their most recently completed fiscal year, have generated positive operating cash flow despite reporting negative net income:
|
Company
|
Market Cap
|
Operating Cash Flow
|
|
Boston Scientific
(NYSE:BSX)
|
$19.1B
|
$2.10B
|
|
Coinstar
(Nasdaq:CSTR)
|
$933M
|
$105M
|
|
Electronic Arts
(Nasdaq:ERTS)
|
$15.2B
|
$353M
|
|
Lennar
(NYSE:LEN)
|
$2.20B
|
$106M
|
|
Popular Inc.
(Nasdaq:BPOP)
|
$2.44B
|
$495M
|
|
Data as of market close September 3, 2008
|
Coinstar Who?
If I were to ask a room full of people if they’ve ever heard of a company called Coinstar, my guess is I'd be looking at a room full of blank stares. However, if I asked that same crowd if they’ve ever seen a machine that converts spare change into vouchers, or one of those DVD rental machines, I bet a lot of hands would go up. Coinstar owns and operates these machines.
The Washington-based company is coming off a decent second quarter. In the period ended June 30, its revenue came in at $219.9 million which was a spectacular jump over the roughly $137.4 million it turned in during the comparable period last year.
The Downside
On the downside its diluted earnings per share came in at 9 cents versus 12 cents in the comparable period last year.
However, for the full year the company is expected to earn 58 cents per share, and in 2009 it's expected to earn $1.01 per share. In 2007 it reported a loss of 80 cents a share.A prolonged economic soft patch could crush the company. The fewer people who venture into stores, the fewer people that will use its machines.
Bottom Line
There is an old adage: It takes money to make money. Cash flow is the metric that lets you see how a company spends its cash, and where it is coming from. Sometimes a company looks sicklier than it actually is, and cash flow can help you discern if there is a turnaround opportunity in the works.
Not all of the stocks we've looked at are guaranteed to see gains in share price, but having examined their cash flow, it's likely that we could be looking back at them in a year from now and wondering how Wall Street misread the true health of their earning potential.
For related reading, check out Analyze Cash Flow The Easy Way.
