How much cash do the companies in your portfolio have in their coffers?
It's a pertinent question these days, as credit concerns have helped topple companies left and right. But companies with cash coming in don't need to worry about how they'll pay the bills.
So here's what you need to look for, if you want to find stocks with solid cash flows.
The Statement of Cash Flows
The statement of cash flows is one of three big financial statements that companies release to their investors. The other two: the income statement and the balance sheet.
The statement of cash flows breaks down the cash a company gets (or spends) as a result of their operating (normal business), financing, or investing activities (for more, check out "
Getting Started: The Statement of Cash Flows").
If you always thought that the amount of cash a company gets isn't much different from its income, think again. Income gets recorded when services are rendered or products are delivered -- not necessarily when cash trades hands.
And while that may sound like a technicality, it's really not. Lots of companies see a long time pass between delivering their product and collecting the cash for it.
Just think about the last time you saw a commercial for furniture stores that let you defer payment for 90 days when you buy a
La-Z-Boy (LZB Quote - Cramer on LZB - Stock Picks) from them. If you buy a new sofa this month with those terms, the store will record the sale in 2008, but since you won't have to pay up until January 2009, cash and income won't equal each other.
The difference between cash and income is more significant now than ever.
Companies who can't meet their obligations with cash on hand are having trouble borrowing money from loss-weary
banks. Companies with positive cash flows have a significant cushion of
liquidity compared to those who don't.
Jonas Elmerraji
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