If achieving profit is a company’s goal then having healthy cash flow is most essential to its existence, development and success. This is because cash offers strength, vitality and flexibility to make investment decisions as well as the fuel to run its growth engine.

Admittedly, investors flock to companies that earn profits, but even a profitable business can succumb to failure if its cash flow is irregular and eventually file for bankruptcy. But a company’s resiliency can be fairly judged when its efficacy in generating cash flows is assessed. This is because cash not only shields a company from market mayhem but also indicates that profits are being channelized in the right direction.

To figure out this efficiency, one needs to consider a company’s net cash flow. While in any business cash moves in and out, net cash flow explains how much money the company is actually making.

If a company is experiencing a positive cash flow then it denotes an increase in its liquid assets, which gives it the means to meet debt obligations, shell out for expenses, reinvest in business, endure downturns and finally return wealth to shareholders. On the other hand, a negative cash flow indicates a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

However, having a positive cash flow merely does not secure a company’s future growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.

Therefore, this earnings season and beyond, don’t look at profits only before picking stocks. Make sure to look for stocks with dependable and increasing cash flows.

Screening Parameters:

To find stocks that have seen increasing cash flow over time, we ran the screen for those whose cash flow in the latest reported quarter was at least equal to or greater than the 5-year average cash flow per common share. This implies a positive trend and increasing cash over a period of time.