Cash Flow

Net income minus preferred dividends plus depreciation (as given in the income statement). Generally speaking, cash flow is the best measure of a company's profits, and is usually calculated by adding depreciation and any other non-cash charges to earnings after taxes. Investors look to cash flow for several reasons: because firms have accounting leeway when it comes to reporting net income; because depreciation charges, while substantial in many industries, aren't genuine bills that have to be paid; and because cash flow is the key to a company's ability to pay dividends, cover debts and so forth. Thus, some analysts focus on the ratio of price to cash flow rather than the traditional price/earnings (P/E) measure. Cash flow is especially useful in assessing firms in capital intensive industries -- cable TV, for instance -- in which huge depreciation charges can hide healthy profits.

 

 

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