An investment green flag is a high cash flow score, but how can you find that using Equities Lab? Let’s jump into it.
To use the Cash Flow Score formula in Equities Lab, simply type “Cash Flow Score.”
Now, this flag looks incredibly simple, but whenever you see orange text in Equities Lab, it means that there is a deeper formula to explore. Clicking on that formula, we are presented with the following –
Though the flag itself is simple, the underlying formula is not. Understanding and analyzing cash flow statements takes time.
Thankfully, we can do it easily here by importing the Cash Flow Score – a number from 0 to 10 based on the above metrics. For each line that is true for a company, it will score 1 point. The lines look for the following –
No score passes our test if it seems biased towards one sector or market cap. When observing the High Cash Flow Score flag, we see that the companies found (150 or so at any point in time) have a wide array of characteristics. The score doesn’t seem to pigeonhole itself. It’s closer to finding companies with a high EPS – and when has that ever been a bad thing?
One of our rules for green flags is the strategy must beat the benchmarked S&P 500 over a given period. Much like the rest of our flags, we set that time frame to 17 years. Of course, the strategy beat the benchmark, but the screen capture that you see below is what surprised me.
The correlation between companies with a High Cash Flow Score and the S&P 500 is staggering. The regression line is almost straight, with very few points in quadrants 2 and 4. So, if the strategy and the S&P 500 have a high correlation, how did the strategy return so much more than the benchmark? Simple, the flag has higher weekly returns.
Finally, we need to ensure that the strategy has an over 50% win rate. We do this for every green flag because it’s a significant component of assigning the “Green flag” status. It doesn’t matter if you made 1000% more than the market or if your strategy relies entirely on the gains of a few companies to offset your losses; your screen will never hold up in the real world.
Remember, flags like this aren’t investing strategies on their own. Instead, they are pieces of a larger puzzle with bits of information that will guide you to better-informed investment decisions.