Here’s The #1 Indicator That Tells Me Whether A Company Is Healthy
Dear Sure Money Investor,
Last week, I told you that I was about to release a single, powerful indicator that gives me a bird’s-eye view of a company’s health. It’s one of the quickest ways to see whether a stock might be toxic. (In case you missed my Toxic Stock Report, click here to read it.)
I’ve released that story today.
One of the most important metrics that I use to evaluate corporate credit quality is free cash flow. Companies need to generate free cash flow in order to be in a position to repay debt. If all of their cash flow is eaten up by interest payments and other expenses, they can never repay debt and are forced to return to the market over and over again to stay alive.
Today, many highly leveraged companies are generating very little free cash flow in an environment when they are paying the lowest interest rates on record on their debt. When interest rates rise (which is inevitable), their cash flow positions will deteriorate further and push many of them into insolvency.
Cash flow is much harder to disguise or manipulate than other accounting metrics such as net income, EBIT and EBITDA. That is another reason why I always focus on the cash flow statement in a company’s financial statements in order to see if a company is generating or consuming cash.
In the end, companies go bankrupt because they can’t pay their bills, and they can’t pay their bills when they run out of cash.
Cash flow is one of the most useful high-level tools to assess a company’s health, and I suggest you add it to your toolbox along with my Toxic Stocks Report.