Course 403: Speculative-Growth Stocks
Is the Business Generating Cash?
In this course
1 Introduction
2 Is Sales Growth Outpacing Asset Growth?
3 What's the Growth Trend?
4 Are Net Margins on the Rise?
5 Is the Business Generating Cash?
6 What Has Growth Done to the Balance Sheet?
7 How Has the Stock Performed?
8 Is it Fairly Valued?
9 Conclusion: Numbers Matter

A company can make a profit without generating any cash. It might, for example, plow every penny that rolls through the door into inventory. Or it may slash prices in order to log sales. Receivables will rise, but the sales won't bring in any cash. Neither of these decisions is necessarily bad, but each raises the risk that a company will face a financial crunch. The inventories won't sell, or a company will fail to collect on its receivables. That's why it's often a good idea to look at cash flow in addition to earnings. To find a company's cash flow from operations, go to the Financials page of its Morningstar Quicktake Report. For Yahoo, we find that its operating cash flow improved from $-15 million in 1997 to $216 million in 1999. That means that the company has generated even more cash than its net income indicates--generally a good sign.< /FONT> If we take cash flow from operations and subtract capital spending (money spent on property, plant, and equipment), the result is free cash flow, or the cash left over after investing in the growth of the business. Yahoo's business doesn't require a lot of capital to grow, so its capital spending has been modest. Its free cash flow was a healthy $59 million in 1998 and $167 million 1999. Yahoo is generating plenty of cash.

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