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

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
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
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
rickey101ter asked:
Good day gentlemen I am a subscriber of various of your products e.g. the above mentioned two and TWS, but I am not happy with the services I [read more]
Published at 07 Feb. 2018 in: Investing Investing 2 answers
bongani.zwane.127 asked:
Hi Francois, I want to invest in ETF for my kids educational funds. I would like to find out which ETF securities can I invest into for a period [read more]
Published at 01 Feb. 2018 in: Investing 1 Answer

Related articles:




Youtube Twitter Facebook

Connect with us:    

  • Accelerated Investor
  • Accessories
  • Accountancy
  • Accountancy services