Stable cash flow is the foundation of the company's survival, and the direct cause of bankruptcy is generally due to breakage of cash flow. At the same time, cash flow is an important factor affecting the valuation of stocks. For example, TSMC's historical P/E valuation is much lower than Asmarck, and one of the important reasons is that it has too large capital expenditure and relatively weak free cash flow. So how do you evaluate your company's cash flow? We need to seize the following 5 key points.

1. Cash flow from operating activities

This is the cash inflow and outflow generated by the company during their daily operations, such as selling products and purchasing raw materials. What we need to focus on is the difference between inflow and outflow, that is, net inflow. If the net inflow from the company's operating activities is above the net profit level from the overall trend, it is a relatively healthy state.

2. Cash flow from investment activities

Cash flow from investing activities includes new plant construction, investment, etc. What we need to focus on is capital expenditure represented by fixed asset transactions. If the company's capital expenditure is too high and most of its net profit will seriously affect cash flow on the one hand, on the other hand, new production facilities need to depreciate in the future, and even face the risk of being eliminated, thus affecting net profit levels. This is why most of the heavy asset companies have a lower valuation.

3. Cash flow from financing activities

Cash flows from financing activities include debt additions and repayments, equity issuance and repurchase, dividends, etc. What we need to focus on is the case of dividend payments and share repurchases. Many companies may not grow in the long term, but by issuing dividends to improve shareholder returns, through share repurchase to improve earnings per share, the company's past share price long-term trend is also good. More typical such as Coca-Cola, Oracle, etc.

4. Cash balance

This is cash from the company's book and short-term investments that can be cash out at any time. If the company's cash balance exceeds short-term liabilities, the liquidity is sufficient and the short-term debt pressure is less. At the same time, if the cash balance continues to grow, it is also a very good sign. However, some companies have strong cash flows, so they often carry out repurchases and dividends. Cash balances may be relatively small, so we can consider taking out the impact of share repurchases and dividends when evaluating them.

5. Free cash flow

Many U.S. stock listed companies disclose free cash flow in their earnings reports, which is a free amount of cash that companies can spend, calculated by subtracting capital expenditure using operating cash flow. It may be more attractive if a company's free cash flow continues to be higher than net profit and keeps growing trend. At the same time, for such companies, the market may also be willing to give a higher valuation.