Writing for Firstlinks, CEO Damien McIntyre discusses the origin and componetary of stockmarket returns.

In a world of low-yielding investment returns, finding solid investments by wading through various measures, metrics and methods can seem an onerous task. Free cash flow is one of the more reliable indicators for return on your investment. This is especially true when companies focus on allocating cash efficiently among internal reinvestment opportunities, acquisitions, dividends, share repurchases and debt repayments.

Cash flow basics

First, it is important to define what cash flows actually are. Cash flows, the income statement and the balance sheet are the three financial statements needed to assess a business.

A company’s cash flow comes in through sales or cash receipts, for example, and out due to operational expenditures. Cash flows in and out are shown through the quarterly cash flow statements. If the cash outflows are greater than the cash coming in, then it is a cash-losing business.

The cash flow statements also represent how much cash in the bank a business has for that quarter. If the business only has a couple of quarters’ worth of cash in the bank, then it may not be a viable business worth investing in.

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