To get comfortable picking apart a stock and building investment intuition, you need to dive deep into the data and formulas of stock screeners. What is yet another aspect of finances to explore? The cash flow score!
Keep reading to learn what a cash flow score is, an explanation using a lemonade stand, the types of cash flow that go into a company, how to access related properties and formulas in Equities Lab, and takeaways.
What is a Cash Flow Score?
At the most basic, a cash flow score is a calculation that shows the money going in and out of any particular business. It will reflect the company’s money earned and where it spends it.
The score is reflected as an integer from 0-10 that measures the health of a company’s Free Cash Flow and Cash Flow Statement.
A positive cash flow percentage indicates more money being earned than spent. A negative cash flow percentage indicates more money is being spent than earned.
Lemonade Stand’s Cash Flow
To understand what cash flow is within a business, read the following analogy!
With 110-degree weather, Barney’s lemonade stand is doing fire numbers. He wants to calculate his cash per day, so this is how he would approach it.
First, he needs to consider the money going into the business or “the cash inflow” of the day.
He has a customer who buys a large cup of lemonade for $5, a family who buys a pitcher for $20, and a group of friends who get three medium lemonades for $3 each.
Barney had a cash inflow of $34.
Next, he needs to calculate the money used for expenses to create the lemonade or “the cash outflow” of the day. The ingredients for the lemonade were $10, and the cups and napkins were $5.
Barney had a cash outflow of $15.
Cash Flow = Total Inflow – Total Outflow
Cash Flow = $34 – $15
Cash Flow = $19
Barney’s lemonade stand has a positive cash flow of $19 for that day! Generally, this is a positive sign! Although cash flow is more commonly analyzed on a quarterly or yearly basis, it is necessary to understand how cash flow is generated.
Different Types of Cash Flow
You might assume cash flow is measured from just one source of income, but it is actually broken down into three different sources. The Cash Flow Statement is sourced from these three factors that represent the origins and use of a company’s money;
- – Operations: Cash found on the income statement reported consistently, such as accounts receivable, accounts payable, and income taxes (the lemonade stand above).
- – Investing: Cash recorded from capital expenditures, business acquisitions, or long-term investments such as selling assets, business, or securities, as well as the purchase and use of equipment, real estate, etc.
- – Financing: Cash flow recorded from debt or equity, which includes paying dividends, purchasing or selling stocks/bonds, taking out a loan, and paying off debt.
Once you know these three categories that make up cash flow, you can now recognize that “Free Cash Flow” refers to the following metric,
Free Cash Flow = Operating Cash – Capital Expenditures
When you see “Free Cash Flow,” you now know what makes up the metric and how it differs from operating cash, etc.
Analyzing Cash Flow in Equities Lab
What’s the point of knowing what cash flow is if you can’t apply it? Well, with Equities Lab, a backtesting investment strategy would be approaching the market with the cash flow properties and formulas already accessible with our software.
Below, the two screenshots demonstrate the properties and formulas you can use to create stock screeners simply by typing “Cash Flow” into the search bar. Do you feel unsure of the success you might have? Better to mess around with it than not try at all!
Cash flow can be an approach to evaluating financial success, especially when you know the terminology at play. Don’t underestimate the value of learning the basics and messing around with the software that can show proven success. Check out Equities Lab today to learn how to invest based on success.