Third, the cash-flow statement shows how a company generates and uses cash over a specific period. It provides insight into a company’s ability to generate cash from its operations, invest in its business and pay dividends. Look at the operating cash flow first to see if the company’s business actually generates cash. Then look at financial and investment cash flows.
Another is depreciation and amortization, which refer to the method a company uses to allocate the cost of its assets over their useful lives. Investors should understand these policies to ensure they are consistent with industry norms. A company with consistent earnings growth over several years is more likely to have high-quality earnings than a company with erratic earnings.
Also, a company with a high return on equity is more likely to have high-quality earnings than a company with a low return on equity. And investors should remember that many companies do not pay much in taxes when they are growing, so it is important to know how earnings will change once a company becomes cash taxable.These metrics can have a significant impact on a company’s financial health. Investors should examine a company’s debt levels to determine if they are sustainable and manageable.
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