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You must check a company's cash situation before investing in shares… Here's why and how to do it…

by , 03 July 2015

When you're looking to invest in shares, you'll look for certain factors that indicate the share price will rise in the future, making you money.

Cash is one thing you should pay attention to. Cash helps you to weigh up the quality and the value of a business before you buy shares.

Read on to find out more…


Why you should check out a company’s cash position before investing


One indicator of a great company is high profit margins. If a company can keep its profit margins high and consistent over the years, chances you’ve unearthed a great investing opportunity.
 
High profit margins tell you a company has a great brand, product or something that makes it stand out from the crowd. To see exactly how much cash a company’s made, you need to look at the company’s cash flow statement in its annual report.

Once you have the cash flow statement, look for the figure beside ‘total cash flow from operating activities’.

Then have a look at the income statement to find out the company’s total revenue. Porter Stansberry in Daily Wealth explains.

To work out the company’s cash operating profit margin, divide cash profits by the total revenue.

For example, Company ABC’s ‘total cash flow from operating activities’ is R10.6 billion and its total revenue was R45.9 billion, its cash flow from operating activities is 23% ((R10.6 billion/R45.9 billion) x 100).


Look for cash operating profit margins above 20%


If you get a cash operating profit margin of 23%, it means the company is earning R0.23 in profit on every rand it generates in sales.

If you can find a company with a cash operating profit margin of more than 20%, chances are you’ve got your hands on an excellent company.

So there you have it. Why you should check a company’s cash situation before investing in shares.

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You must check a company's cash situation before investing in shares… Here's why and how to do it…
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