Go With the Cash Flow

You gotta love having cash in your pocket. Something about it makes you feel and appear powerful.

Companies with cash have the same aura. Having cash implies a strong, well-run business. "Cash is king" for a reason: You need it to run the shop. And if you come across a company that doesn't have any cash, you might want to take your investment elsewhere -- or at least consider shorting the stock.

Over the past couple of months, we've taken a look at how to evaluate companies' financials through their 10-Qs, balance sheets and income statements. There's one more big one to examine: the cash flow statement. It will help you determine just how much cash is available for a company's business.

Since the cash flow statement explains the company's overall cash position, many will argue that it is the most important of the three statements. And while it clearly offers a ton of info, it's not perfect.

Sure, it shows the cash coming in and out, but it doesn't show the stuff the company owes -- such as its liabilities. Think of your upcoming rent payment. Your checkbook doesn't actually report that bill until you pay it. And since the cash flow statement is like one big checkbook, you won't find upcoming liabilities here. You'll need the balance sheet for that.

Same goes for previously purchased assets. They hit the cash flow statement in the period they were purchased. But after that, they just sit on the balance sheet as well, so if you're looking at a company for the first time, the cash flow is not going to give you info about its asset accounts.

But regardless of its shortcomings, this statement is still invaluable. The days of investing in cashless companies blew up with the tech bubble. Your company better have money to pay the bills, expand its business and issue you a dividend.

To watch Tracy Byrnes' video take of this column, click here.

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