If achieving profit is a company’s goal then having healthy cash flow is most essential to its existence, development and success. This is because cash offers strength, vitality and flexibility to make investment decisions as well as the fuel to run its growth engine.
Admittedly, investors flock to companies that earn profits, but even a profitable business can succumb to failure if its cash flow is irregular and eventually file for bankruptcy. But a company’s resiliency can be fairly judged when its efficacy in generating cash flows is assessed. This is because cash not only shields a company from market mayhem but also indicates that profits are being channelized in the right direction.
To figure out this efficiency, one needs to consider a company’s net cash flow. While in any business cash moves in and out, net cash flow explains how much money the company is actually making.
If a company is experiencing a positive cash flow then it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.
However, having a positive cash flow merely does not secure a company’s future growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.
Therefore, this earnings season and beyond, don’t look at profits only before picking stocks. Make sure to look for stocks with dependable and increasing cash flows.
Screening Parameters:
To find stocks that have seen increasing cash flow over time, we ran the screen for those whose cash flow in the latest reported quarter was at least equal to or greater than the 5-year average cash flow per common share. This implies a positive trend and increasing cash over a period of time.
In addition to this we chose:
Zacks Rank 1: No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance.
Average Broker Rating 1: This indicates that brokers are also highly hopeful about the company’s future performance.
Current Price greater than or equal to $5: This sieves out low-priced stocks.
VGM Score of B or better: This score is also of great assistance in selecting stocks. Importantly, this scoring system helps in picking winning stocks in their individual industry categories.
Here are four out of eight stocks that qualified the screening:
Kulicke&Soffa KLIC, headquartered in Singapore, is a leading provider of semiconductor packaging and electronic assembly solutions supporting the global automotive, consumer, communications, computing and industrial segments. The company has a VGM Score of A.
Kulicke&Soffa has a projected long-term growth rate of 12%. The stock has experienced positive estimate revisions, with the Zacks Consensus Estimate for fiscal 2018 earnings moving 32% north in two months’ time.
SP Plus Corporation SP, based in Chicago, provides professional parking, ground transportation, facility maintenance, security and event logistics services to property owners and managers in all markets of the real estate industry. The company has a VGM score of B.
SP Plus has a projected long-term growth rate of 10%. The stock has experienced solid estimate revisions. The Zacks Consensus Estimate for full-year 2018 earnings has increased 7.5% in a month’s time.
France-based Arkema SA ARKAY is engaged in the manufacturing and marketing of vinyl, industrial chemicals and performance products. The company has a VGM Score of A.
Arkema SA has a projected long-term growth rate of 8%. Moreover, the Zacks Consensus Estimate for 2018 earnings has risen by 10.2% to $11.42 in a month’s time.
Modine Manufacturing Company MOD, headquartered in Racine, WI, is engaged in designing, manufacturing and testing of heat transfer products for a vast range of applications and markets. The company has a VGM Score of A.
The stock has experienced positive estimate revisions, with the Zacks Consensus Estimate for fiscal 2018 earnings moving 4.9% north in two months’ time.
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