CASH FLOW MORE IMPORTANT THAN CASH IN THE BANK
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.