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 .
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