Subtract your net investment in operating capital from your net operating profit after taxes to find your free cash flow.Read research studies written by internationally known author and trader Thomas Bulkowski.You could also use a variety of net income statement and balance sheet line items to get to your free cash flow number.How to Pick Stocks Using Fundamental Analysis. What fundamental factors power stocks that rise by 10 times? Want to read more about other fundamentals?.Sorting the price to cash flow ratios and averaging the performance gave the results shown in the table. Moved to 1993 and started a new calculation, and so on until I ran out of data. In other words, I computed each stock’s price to cash flow ratio for 1992 and measured the price change from year end 1992 to year end 1993 and then Using almost 1,000 samples, I found that those stocks with price to cash flow ratios below or equal to the median outperformed those with ratios above the median from 1992 to 2007 on a 1 yearīasis. In a second test, I compared stocks with price to cash flow ratios above and below the median of all stocks. I consider this result preliminary and intend to expand the database and then publish my findings. Those with a high ratio 78% of the time (51/65). If you count the yearly performance of each entry when the price to cash flow ratio was above or below the median, you will find that stocks with a low price to cash flow ratio outperformed There were 88 to 89 samples that qualified for the study. No more results appear for that row because the years had not ended when the study was done. To a loss of 2.2% for stocks with a price to cash flow ratio at or below the median. Stocks with a price to cash flow ratio above the median 11.96 had gains averaging 17.5% in 2007 compared The following table shows the results of price to cash flow ratio (PCF) versus performance over time. Years 2008 and later are not included since the year had not completed as of the time of this study. The price change measured from the close on the last trading day of each year. Īfter completing the database, I logged the close-to-close price change from 1 to 5 years out, lookingįorward from the base year. I used the Value Line investment survey and typed in their cash flow per share numbers to build a database of 178 stocks with data ranging from to. The cash flow is high relative to the stock’s price.Ī second test using almost 1,000 samples shows the same result, with stocks having price to cash flow ratios below the median beating the performance of those with ratios above the Value Line defines cash flow per share as "net profit plus non cash charges (depreciation, depletion, and amortization), less preferred dividends (if any), divided by common sharesĪ study of the price to cash flow ratio shows that stocks having a low ratio outperform those with a high price to cash flow ratio 78% of the time. Lynch goes on to say that a 10 to 1 ratio is standard for price to cash flow. It is far better to spend 40 cents to make a dollar than it is to spend 80 cents per dollar. That the critical difference between companies, is how much it costs them to generate the cash. Peter Lynch writes in One Up on Wall Street that cash flow "is the amount of money a company takes in as a result of doing business." He says Cash flow is an indicator of the company’s ability to generate cash that itĬan use to run its business. Cash flow is a biggie among some traders, investors, and analysts that use fundamental analysis.
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