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Strategies & Market Trends : Z Best Place to Talk Stocks
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To: E.J. Neitz Jr who wrote (49883)11/27/2003 3:19:06 AM
From: Mark Adams  Read Replies (2) of 53068
 
Take their net income, add depreciation and decreases in payables back in, then subtract increases in receivables and inventories. That leaves cash flow from operations, or operational cash flow.

If I might rephrase- 'adjust net income for working capital changes and add back depreciation'.

I think this approach is a bit shallow, but perhaps a clue as to the correct direction. If you are going to add back depreciation, you need to account for CAPEX. Not all capex can be considered voluntary- there are O&M issues.

In fact, another indicator might even look at changes in DDA vs CAPEX over time. This might show up companies that are milking assets in a wasting mode, or companies that are facing a cash crisis. Such companies might exhibit a sudden shift in CAPEX vs DDA.

The ideal enterprise might be one that is creating increasing streams of cash flow via organic growth, without suffering margin compression. Now how do we get a screener to spit out those candidates?
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