Investor Education Centre > Income Producing Investments > Investing for Position Cash Flow: What to look for
Investing for Position Cash Flow: What to look for
You’re likely already aware that going in blind is unwise when you’re choosing to invest. Researching the company you’re about to invest in requires effort, but it’s also the best way to protect your cash. One way to approach this is to look at position cash flow to ascertain how quickly the business generates cash from its daily activities, and how much or how little it needs to rely on investors. If you’re new to investing for position cash flow, it’s useful to know what to look for.
Make sure you’re analysing the cash flow, not the cash budget
It’s always handy to make sure you’re analysing the right information before doing anything else. Some companies may keep both a cash budget and a cash flow. The budget will provide you with a snapshot of how the company is performing right now compared to any previous analysis made. In contrast, a cash flow statement looks at various elements of how cash is flowing in and out of a company, including assets held, money owed, and capital. In other words, a cash flow statement provides far more information for you to assess.
Querying where most of the cash flow comes from
If most of a company's cash is generated from its daily activities, this is an indication that it is stable. For example, if it’s in the business of selling the latest tech gadgets, most of its income should come from that. Of course, this is a rather simplified view, but it’s better than the alternative. If a company is generating most of its income from investing elsewhere or financing, it’s worth questioning whether it can generate positive cash flow on a long-term basis.
Do the company’s vendors receive payments?
No company is an island, which is well worth remembering when you’re examining its solvency. If the company you’re looking at has lots of outstanding payments to vendors, you might want to step away. If it has a long-standing history of this, back away rapidly. Most markets spread news like wildfire, which means when a company generates a history of not meeting payments it usually gets a bad reputation that makes accessing vendors difficult in the future.
How will the company meet its debt responsibilities?
Accruing lots of debt isn’t necessarily a bad thing, but this does depend on the company’s ability to generate large amounts of cash, possibly using a necessary service. For example, a business in aviation carrying a large debt load is likely in a shakier position than a gas company. Why? Because most people need gas in their homes, but most won’t need to take a flight.
Overall, knowing more about how to assess a company’s position cash flow places you in a powerful position. This means you can look beyond temporary poor liquidity and see the value that comes with excellent long-term solvency. By identifying companies with excellent long-term prospects, your investment potential will strengthen and you’ll increase your chances of experiencing excellent returns.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.