How to find the best shares to buy by focusing on cash

Julie Brownlee, Fsp Invest, 07 Jul. 2015

Tags: best shares to buy, cash, cash conversion ratio, profitable shares, investing



To succeed over the long run, a company must be profitable. In other words, the money coming in must be greater than the money going out.

To check out the profitability of a company, you can’t just rely on its profit figures alone. With some clever accounting, a company’s profits can look better than they really are.

So it’s worthwhile having a look at the company’s cash situation.

Read on to find out how you can do this…



The best shares to buy generate lots of cash


To see how well a company is likely to do in the future and to help you find the best shares to buy, you need to look at how well a business generates cash.

For instance, if you’re investing for dividends, a company needs cash to pay them.

If a company struggles to make cash, it can get into financial difficulties and is at risk of going bust.


Checking how a company turns its profits into cash


So you need to work out how well a company converts its profits into cash. You just need two figures to compare:

  1. Operating profit number – from the income statement; and
  2. Operating cash flow – from the cash flow statement.

Say Company ABC has operating profits of R200 million. It has operating cash flow of R160 million. This gives it a cash conversion ratio of 80% ((R160 million/R200 million) x 100).

Another good comparison to make is using:

  • Net profit – profit for shareholders; and
  • Free cash flow – the amount of cash a company has left after paying all costs and making investments.

Sometimes companies go through periods when their cash flow is lower than at other times. But watch out if this happens a lot. It could be a warning sign as to what lies ahead.

So there you have it. How to find the best shares to buy by focusing on cash.

*********** Recommended Product ************

Did you miss out on Francois Joubert’s Penny Stock Boot Camp on the 20th of June?

It’s not too late. We filmed every presentation. Every investment idea.

You can still eavesdrop on the entire event right here.

*******************************************


Related QA

Pic
d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
Pic
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
Pic
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
Pic
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
Pic
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles:


Latest:

Comments
0 comments



 
 


Youtube Twitter Facebook

Connect with us:    

POPULAR TOPICS
  • Accelerated Investor
  • Accessories