|By Nathan Young|
May 17, 2017
Operating cash flow is EBITDA minus taxes, and this helps you to determine the quality of the company. When looking at a company for a potential investment, you want to know that their cash flow from operations is at a respectable level. This is what will help the business continue to operate and flow.
If you are taking a look at the company, you can look as cash flow as the blood of the business because with out cash, the company would be unable to operate. This area of the company is fairly black and white because the health of this area is either good or poor.
However, there could be reasons for why cash flows from operations are poor, and you need to figure out why. If there is something in their quarterly report that states operations are going through a reorganization or they are adjusting certain things and it is a off deal, then just take it with a grain of salt and watch. If it is poor because of slowing sales and the quality is lacking, that could be an indication of a greater underlying problem.
Cash flow in general should be healthy because again, it is the life blood of the company and allows it operate. You may also see a constriction of overall cash flow if the company is purchasing new equipment or building new buildings, and that is alright because it should increase cash flow later. That would be something you look at as an investment.
Lastly, compare it against other companies and see if you can generate percentages and compare apples to apples. You want to see what others are doing in the same industry and if the company you are invested in is doing the same. If there are differences, take the time to figure out why because it may be company specific and non threatening to the company’s health.
Cash flow is important and should not be skipped in your research. Use it with other points in the company and construct a picture that will give you an idea of how the company is going to perform going forward. Consult with investing communities and investing professionals as they can help to point you in the right direction.