CASH FLOW MORE IM­POR­TANT THAN CASH IN THE BANK

Finweek English Edition - - Cover -

FOR THE CAL­CU­LA­TION of its qual­ity in­dex, PSG places con­sid­er­able em­pha­sis on two ra­tios, both of which show the im­por­tance of cash flow. Rather than merely cal­cu­lat­ing the or­di­nary price:earn­ings (p:e) ra­tio, where the share price is di­vided by profit, they di­vide the share price by the an­nual cash flow per share. They call this the price:cash flow. It’s just as use­ful as the or­di­nary p:e for find­ing at­trac­tive shares quickly, but it’s more re­li­able, be­cause cash flow can’t lie.

A sec­ond ra­tio they use is the cash flow per share ex­pressed rel­a­tive to or­di­nary head­line earn­ings. This is called cash flow per share.

Coro­na­tion’s ra­tio of 1,58, for ex­am­ple, means that the com­pany’s cash flow in the latest re­port­ing pe­riod was 1,58 times its earn­ings per share. The big­ger this fig­ure and the more of­ten it’s achieved, the bet­ter the share, ac­cord­ing to this for­mula of PSG. So it’s no sur­prise that Coro­na­tion was given a qual­ity rat­ing of 100.

The ta­ble shows a few smaller com­pa­nies that, thanks to their ex­cel­lent op­er­at­ing cash flow – which must later, of course, in­crease their bank bal­ance – of­fer safe in­vest­ment op­por­tu­ni­ties.

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