life ideas

September 15, 2006

cash statement in picking stocks

Filed under: financial statements, stock, Uncategorized — manoftoday @ 6:22 pm

1)cash statement is the most reliable information without manipulation.we are interested in free cash flow:

operation cash flow //from operating activity (1)
-income tax benefits because exercising stock options;

– (deferred tax) //because deferred tax is not a true inflow of cash . however, company has to pay the tax in the end ultimately. since deferred tax is a negative number,this will be added back to wash out its effect.

true operation flow

– cap ex

– one time payment


free cash flow

thus, we can compare free cash flow year by year.

2)quality of earning. QE ration

QE = (net income – free cahs flow)/ averaged total asset.

averaged total asset = (last year’s total asset + this year’s total asset) /2

QE <0.03 indicates good .

3)PEG ratio

P/E ration / growth ration = PEQ

  • 0.50-0 buy
  • 0.50-0.65 lookto buy
  • 0.65-1.00 watchor hold
  • 1.00-1.30 look to sell
  • 1.30-1.70 consider shorting
  • over 1.70 short

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