There are many ways to evaluate a company: valuation, profits, sales, customer growth, dividend payments, insider purchase and a lot of metrics more. But the one used by the biggest money managers, with clients worth $10 million or more is cash flow.
Investors should definitely consider cash. If a company doesn’t have enough of it risks bankruptcy or at least can not grow. Pulling together its operating, investing and financing cash flows into a net cash flow tells us a lot about a company’s health. Unlike profits, cash flows are difficult to manipulate.
Research by the global asset manager Schroders suggests that because high-quality businesses tend to be more cash generative, they can also sustain higher dividend growth and more efficient debt. These qualities persist over the long term, allowing these businesses to grow sustainably.
Cash return on capital invested (CROCI) is the clearest signal that your investment will bring you extraordinary returns. Goldman’s wealth management division showed that companies with a high cash return on capital invested generated an average gain of 30% per year over the long term.
CROCI is a formula for measuring how much cash a company receives on the capital it invests. It’s a measure of the efficiency of a company. It also indicates how much demand the company’s products have. And as cash is the root source of profits, it’s a pure measure of a company.
Sven Franssen