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Cash Flow is King

|Includes: BP p.l.c. (BP), MO, PM

There are so many different ways to value a stock and evaluate the health of a company. Many investors focus on earnings and every quarterly report fret about each penny per share that the company exceeds or misses estimates by. There is nothing wrong with judging a company by earnings, but that is certainly not the whole picture. In fact, in can be dangerous to just look at reported earnings.

A Better Measure

In addition to earnings, make sure to look at the company’s cash flow. More specifically cash flow from operations is the most important item in my opinion. Basically this is the amount of cash coming into the company due to the core functions of the company. No firm can sustain strong earnings growth without this measure growing too.

Cash flow is much harder to manipulate than earnings. Management can legally tweak certain things to make earnings look better in order to appease Wall Street, but cash flow is much purer. Avoid companies in which earnings are growing but cash flows are falling. Trouble is surely on the horizon for such companies.

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