Often when we talk about the share market and large companies such as BHP, WOW or CBA investors have a hard time comprehending how these companies work.
True their structure, financing arrangements and business models are very complicated. The average person has little understanding of how they work and what to look for when investing.
But one indicator holds true for all businesses whether they are large multi-national companies or the small one man business - cash flow.
The cash flow of a business is the life line of that business. Simply put if the company generates enough cash flow to cover its expenses it will make a profit.
If it can do this consistently then it is a quality business.
If the company has to borrow to meet cash flow demands then the risk of this company is higher.
If you then combine this indicator with another, dividends per share, you will quite simply get a very good idea of how this company is performing.
Dividend per share is the amount of surplus cash not required by the business and as such paid out to the shareholders as return.
Again with dividend per share there are a couple of traps to look out for. First, that they are not borrowing to pay the dividend. This should be detailed in the cash flow, and second dividend reinvestment, are the extra shares simply issued by the company or purchased on market. Companies which issue more shares to pay dividends are in affect borrowing to pay the dividends and as such carry more risk.
If you apply these two indicators and find a company which has a sufficient cash flow to pay dividends and the dividend yield is above the cash rate then long term this will be a quality company and you can expect to see long term growth in this stock.
In a market such as we have now, income and cash flow are the keys to successful investing.
Choosing companies which meet the above criteria will provide you a return above the bank bill rate and long term growth.
The above provides you with the tools to prepare a back of the envelope calculation to quickly measure up if a company is worth investing in or not.
Do you have any questions on the above?
Please give me a call I am happy to discuss. Call (07) 4771 4577.