Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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Twelve Companies Generating
Mountains of Free Cash Flow |
Published:
September 13, 2007
Earnings remain the most widely watched gauge of corporate
performance. Legions of Wall Street analysts develop models and
offer estimates for earnings. And when a company releases
results, earnings per share (EPS) is usually the first number
investors focus on. Not surprisingly, this is an important
figure for investors to watch.
However, earnings don't tell the full story. After all, a
company's reported profits do not represent actual cash flowing
into corporate coffers. That's because earnings include a wide
number of non-cash charges, such as depreciation and
amortization.
For example, when a company buys a machine for $1 million, the
firm depreciates that machine over a certain number of years --
say $200,000 per year for five years. Each year the corporate
accounts will reflect a $200,000 charge representing a portion
of the value of that machine. This continues until the machine
is fully depreciated.
But this number doesn't reflect actual
cash paid for the machine. And the depreciation charges don't
represent the actual cost of running the machine and keeping it in
good working order. These charges
are simply an accounting entry on the firm's books. Even once
the value of the machine is fully depreciated, it could still
have value as scrap or, in fact, have years of useful life
ahead.
Depreciation is a simple example of a non-cash charge. Of
course, there are many others. And while corporate accounts in
the U.S. are prepared according to pre-set accounting
principles, that doesn't mean there isn't room to dress-up
earnings. Companies routinely use a number of perfectly legal
accounting tricks and sleights of hand to dress-up their
earnings results -- most companies like to report results that
at least match Wall Street's expectations.
Cash flows offer another useful way to gauge a company's growth
and profitability while avoiding some of the pitfalls inherent
in earnings figures. Cash flow results are far harder to
manipulate than earnings. And one of the most useful measures of
cash flow is what's known as
free cash
flow (FCF).
Free cash flow is defined as follows:
FCF = Operating Cash Flow - Capital Expenditures
To get a better understanding of this formula, we need to take a
closer look at each of its components:
Operating Cash Flow -- This can be found as a line item
on every public company's statement of cash flows. As the name
suggests, this represents the cash a given firm generates from
its day-to-day operations. To come up with this figure, you
essentially take a firm's net income, add back any non-cash
charges (such as depreciation), and then make a few other
adjustments (changes in accounts receivable, inventories, etc).
Capital Expenditures (CAPEX) -- This represents the
money that a company uses to purchase or improve upon its
physical assets -- its property, plant, and equipment.
Consider what free cash flow measures. Operating cash flow
represents the actual cash that the business generates.
Meanwhile, CAPEX represents the investment the firm must make to operate its
business -- without capital spending, the business would
eventually cease to exist. Therefore, free cash flow is a
measure of how much actual cash is left for the owners of the
business after all necessary expenses have been paid. In
essence, FCF is a measure of the "cash profits" available to
shareholders.
Cash flow represents the lifeblood of any growing business. With
it, companies are able to invest in future growth, pay down
debt, complete value-added acquisitions, repurchase stock and
pay dividends (if done properly, all of these tend to be
shareholder-friendly activities). Without a healthy stream of
free cash flow, however, most businesses tend to run into a host
of problems. These include ballooning debt burdens, financing
troubles and cash flow management issues, among other things.
What To Look For
Because cash flow is so critical to every company's ultimate
success or failure, my staff and I recently went on a hunt for
firms that have generated strong free cash flow (FCF) in recent
years . . .
Important Note: Throughout the
remainder of this article, StreetAuthority co-founder Paul Tracy and our research
staff provide the names of 12 companies that meet the criteria
listed above. However, in order to view
the remainder of this article, you'll need to subscribe to our
premium newsletter -- the StreetAuthority Market Advisor. After you subscribe
you'll receive immediate access to this full article, as well as
our monthly Market Advisor newsletter and a host of
additional premium content. Please visit one of the following
links to continue...
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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receive in-depth guidance on today's leading investing
opportunities each month, plus access to five model
portfolios, please subscribe to Paul Tracy's premium investment
newsletter -- the StreetAuthority
Market Advisor. |
Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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