In this article I present AAII’s strategy that explores the basics of cash flow analysis and the implementation of a price-to-free-cash-flow (P/FCF) screen. Firms with low price-to-free-cash-flow ratios may represent neglected firms at attractive prices. Our screen looks for companies with a price-to-free-cash-flow ratio below the median for their industry and below the company’s own five-year average.
Seeking Free Cash Flow Generation
Cash generation is “king” for many investors selecting stocks. Earnings, dividends and asset values may be important factors, but it is ultimately a company’s ability to generate cash that fuels the growth in these factors. Strong cash flow allows a company to increase dividends, develop new products, enter new markets, pay off liabilities, buy back shares and even become an acquisition target.
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