There is arguably nothing more important in company analysis than cash-flow trends. Even when a company’s earnings are growing, cash flow may be flat or even falling. After all, earnings are subject to many estimates from management, whereas cash flow is very hard to manipulate.
For this list, we screened for companies that are seeing positive trends in both cash flow and earnings. We began by searching for companies with significant growth in operating cash flow/common equity, comparing the company’s five-year average to its trailing-twelve-month (TTM) figure. We then ran a profitability analysis of return on equity (ROE) using DuPont analysis. ROE can be broken up into three components such that changes in ROE can be attributed to those components.
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with:
- Decreasing leverage, i.e. decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio).
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage. The final screen produced four stocks, listed below.
We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 index over the last month. To access a complete analysis of this list's recent performance, click here.
List sorted by market cap.
1. Terra Nitrogen Company, L.P. (NYSE:TNH): Agricultural Chemicals Industry. Market cap of $2.49B. MRQ Net Profit Margin at 61.68% vs. one-year-ago quarterly Net Profit Margin at 28.57%. MRQ Sales/Assets at 0.55 vs. one-year-ago quarterly Sales/Assets at 0.48. MRQ Assets/Equity at 1.19 vs. one-year-ago quarterly Assets/Equity 1.48. TTM Operating Cash Flow/Common Equity at 1.55 vs. five-year average at 1.29. The stock has gained 31.19% over the last year.
2. DepoMed Inc. (NASDAQ:DEPO): Drug Manufacturers Industry. Market cap of $450.29M. MRQ Net Profit Margin at 118.92% vs. one-year-ago quarterly Net Profit Margin at -24.93%. MRQ Sales/Assets at 0.46 vs. one-year-ago quarterly Sales/Assets at 0.18. MRQ Assets/Equity at 1.45 vs. one-year-ago quarterly Assets/Equity 6.6. TTM Operating Cash Flow/Common Equity at 1.26 vs. five-year average at -0.20. The stock is a short squeeze candidate, with a short float at 11.89% (equivalent to 7.54 days of average volume). The stock has gained 31.92% over the last year.
3. Great Panther Silver Ltd (NYSEMKT:GPL): Silver Industry. Market cap of $428.19M. MRQ Net Profit Margin at 45.34% vs. one-year-ago quarterly Net Profit Margin at 12.37%. MRQ Sales/Assets at 0.23 vs. one-year-ago quarterly Sales/Assets at 0.19. MRQ Assets/Equity at 1.14 vs. one-year-ago quarterly Assets/Equity 1.49. TTM Operating Cash Flow/Common Equity at 0.21 vs. five-year average at -0.19. The stock has gained 15.66% over the last year.
4. 8x8 Inc. (NASDAQ:EGHT): Communication Equipment Industry. Market cap of $301.85M. MRQ Net Profit Margin at 11.06% vs. one-year-ago quarterly Net Profit Margin at 6.99%. MRQ Sales/Assets at 0.68 vs. one-year-ago quarterly Sales/Assets at 0.67. MRQ Assets/Equity at 1.68 vs. one-year-ago quarterly Assets/Equity 1.78. TTM Operating Cash Flow/Common Equity at 0.59 vs. five-year average at 0.13. The stock has had a couple of great days, gaining 20.9% over the last week.
Cash flow data sourced from Screener.co, accounting data sourced from Yahoo Finance; all other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.