Can you rely on a cash flow score as the sole indicator for an investment?

Calculating the Cash Flow Score 

Should you invest in a company based only off of the Cash Flow Score? Or should you rely on more than just 1 metric to decide if you are going to invest? 

Keep reading to see an exploration of the Cash Flow Score using Equities Lab. 

What is the Cash Flow Score? 

The cash flow score is an integer between 0-10 that measures the health of a company’s Free Cash Flow and Cash Flow Statement. 

Free Cash Flow = Operating Cash – Capital Expenditures 

The Cash Flow Statement comprises Operations, Investments, and Finances. 

If you’re still trying to sort that out, check out this article for a strong foundation. 

How To Use the Cash Flow Score 

If you type “Cash Flow Score” into the editor box in Equities Lab, you will have access to the formula. You get to input the score you’d like to use. In this example let’s use “9”.

Notice the words appear in orange. This means there is more to the Cash Flow Score than just the words. If you click on it the formula below will pop up.

As you can see, it’s a pretty complex formula that allows for a specific analysis with an extremely user-friendly approach. 

The Results

The results were calculated from July 30th, 2018 to July 28th, 2023. From a visual indicator, the screener outperformed the S&P 500 for a few moments, then stayed along with it. Maybe the Cash Flow Score approach isn’t the best.  

The charts portion reflected the same by showing a dipped Annualized Alpha, meaning it underperformed. However, it did show a low sensitivity with a low Daily Beta # articulating some level of stability.  

The return percentage is clear, but it’s good to analyze the strategy from a longer time period. 

Results from 20 years

Let’s adjust the results from 2018 to 2023 to see a 20-year difference. Wow, look at the results! The screener is clearly beating the S&P 500 by leaps and bounds.

Why are the results so different? It could be a myriad of reasons, including larger sample size, risk tolerance, Survivorship bias, etc. 

The results on the graph look good! The Annualized Alpha is higher, clearly beating the S&P 500. It maintained a low Daily Beta #, so the low sensitivity is consistent. 

Watchlists 

Now we will take a peak at watchlists to visualize what the formula provides. With a spread across several sectors, we know it must be a semi-solid approach to look at the Cash Flow Score. 

After adjusting the visual settings of the chart, there are several green blocks (indicating positive performance) that are larger and more successful than the others. Let’s examine the three largest visual stocks.

Stock Selection 

The three stocks selected are EXPI, STRN, and UI. Starting with a return of 464.21%, 250.02%, and 165.75%, respectively. With Equities Lab, you can look up more information about each stock with just one click to outside sources. This feature will reinforce the potential success or any red flags that aren’t visible with just one formula. 

Takeaways

Is this a good approach? It is a good component of a good approach. You probably shouldn’t rely solely on these results, but it could be a phenomenal starting point for a winning strategy. 

The best part about creating your own screeners is there can be a baseline. Then your own intuition kicks in, and you get to explore a potential opportunity and find great success. 

Check out some more sources about cash flow, or contact Equities Lab at sales@equitieslab.com today to start creating your own screeners.