In the impending earnings season, investors might be lured by big profits and earnings surprises. However, analyzing a company's ability to produce cash is far more essential because that reveals its true financial health. Cash is in fact a company's lifeblood and holds the key to its existence, development and success.
Even after reaping profits, a company can face a dearth of cash flow and become bankrupt while meeting its obligations if its profits are not channelized in the right direction. But a company with healthy cash flows enjoys the flexibility to make decisions, have the means to make potential investments, efficiently tide over any market mayhem and still ride on the growth curve.
While, in any business, cash moves in and out, it is net cash flow that indicates how much money the company is actually generating or burning. Having positive cash flows indicates enhanced liquidity, giving the company more means for debt repayment, expenses, dividend payouts, stock buyback and finally reinvestment in business. On the other hand, a negative cash flow implies that a company's liquid assets are decreasing, resulting in reduced flexibility to support these moves.
However, positive cash flows alone are not sufficient to predict a company's future growth. If the cash flow is increasing over time, it indicates a company's competency in growing. In fact, rising cash flow implies management's efficiency in regulating its cash movements, reaping more money from its business, depending less on outside financing and finally its improving fundamentals.
So, while picking stocks this earnings season, don't look at profits only. Make sure to look for stocks with dependable and increasing cash flows.
To find out stocks that have seen increasing cash flow over time, we ran the screen for those whose cash flow in the latest reported quarter was at least equal to or greater than the 5-year average cash flow per common share . This implies a positive trend and increasing cash over a period of time.
In addition to this we chose:
Zacks Rank 1: No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today's Zacks #1 Rank stocks here .
Average Broker Rating 1: This indicates that brokers are also highly hopeful about the company's future performance.
Current Price greater than or equal to $5: This sieves out low-priced stocks.
VGM Scoreof B or better: This score is also of great assistance in selecting stocks. Importantly, this scoring system helps in picking the winning stocks in their individual industry categories.
Here are four out of the eight stocks that made it through the screen:
Braskem S.A.BAK is the largest petrochemical operator in Latin America that produces and sells thermoplastic resins. The company is based in Brazil. The stock has a VGM score of A. Over the past 60 days, the Zacks Consensus Estimate for 2016 and 2017 experienced an increase of 1.5% and 6.1%, respectively, to $3.37 and $2.26 per share.
Moreover, Braskem has logged in a return of 34.0% over the past three months, which is way better than the 7.2% gain witnessed by the Zacks categorized Oil & Gas Integrated International industry.
International Consolidated Airlines Group, S.A.ICAGY is a holding company for British Airways and Iberia and engages in the provision of passenger and cargo transportation services in the U.K., Spain, the U.S. and rest of the world. The stock has a VGM Score of A. The Zacks Consensus Estimate for 2017 earnings rose 9.5% over the last 30 days. Also, over the past three months, International Consolidated Airlines' shares recorded an average return of 25.3%.
Calavo Growers, Inc.CVGW , headquartered in Santa Paula, CA, engages in the procurement and marketing of avocados and other perishable foods as well as the preparation and distribution of processed avocado products. Calavo Growers has a VGM Score of B. The Zacks Consensus Estimate for fiscal year ended Oct 31, 2017 earnings increased by 5.9% to $2.50 per share over the last 30 days.
HOYA CorporationHOCPY is a specialty manufacturer of optical glass. The company's business activities include information technology, eye care, medical, and imaging systems. It is headquartered in Tokyo. HOYA Corporation has a VGM Score of B. The Zacks Consensus Estimate for fiscal year ending March 2017 earnings increased 1.9% over the past 30 days.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.