A quick and easy cash flow checklist

Wednesday, May 15 2019 by
A quick and easy cash flow checklist

One time I accompanied a senior analyst to meet the chairman of a company that was rolling out new units at pace. I was just out of university and what little knowledge I had of business came straight from the textbook. This was maybe my first chance to listen to actual professionals talk about the reality of running companies.

For the most part, I sat to one side, wide-eyed, watching the conversation like an owl and scribbling all manner of notes into my little book. Beneath the busyness, I was just happy to be in London, out of the office, and with someone else paying for my lunch.

The details of this meeting have faded with time but one exchange, which I’ll paraphrase, seems to stick. Towards the end of the lunch, the chairman turned to me and said: 'You’ve been quiet. You must have a question for me.' 

I had several hundred, but I settled on one.

'With all these new sites, all these pre-opening costs and adjustments, which numbers do I look at to understand what’s really going on?'

To this, the chairman replied, 'Cash is king' - so I took his advice and checked the cash flow statement.

For investors wanting to hone in on the underlying picture, being able to navigate a cash flow statement is a must. Adding even just a few cursory cash flow quality checks into your investment routine - such as making sure that cash flow from operations routinely covers capital expenditure and dividend and interest payments - can help reduce risk substantially.

You can find my quick take on a cash flow checklist at the bottom of this article.

Different industries, different cash flows

The cash flow statement should be evaluated within the context of the company’s industry and its corporate lifecycle.

Certain industries are capital intensive, like hotels, while others chuck off so much cash they don’t know what to do with it. All else equal, a cash generative company or sector will command a higher valuation multiple than one that requires vast amounts of capital expenditure - so this is an important business characteristic to be aware of.

Take two companies with roughly the same market capitalisation in different sectors, with vastly different cash flow characteristics: Restaurant Group (Hotels & Entertainment Services) and EMIS (Healthcare Equipment & Supplies). You can see…

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The Restaurant Group plc is a United Kingdom-based company, which operates multi-brand casual dining restaurants, pubs and Concessions business. The Company operates over 500 restaurants and pub restaurants. The Company's principal trading brands include Frankie & Benny's, Chiquito, Coast to Coast, Brunning and Price, TRG Concessions, Firejakcs, Garfunkel’s, Joe’ Kitchen and Wagamama. The Company's Frankie & Benny's brand offers classic American and Italian style food and drinks. The Chiquito menu offers a range of authentic Mexican and Tex-Mex dishes. The Coast to Coast offers classic American food, such as double burgers, stone-baked calzones, distinctive steaks, amazing seafood dishes and South-West American specials. The Company also operates a concessions business, which trades principally at the United Kingdom airports. more »

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EMIS Group plc provides healthcare software, information technology and related services in the United Kingdom. The Company’s segments include Primary & Community Care and Community Pharmacy. The Company serves various healthcare markets under the EMIS Health brand. The Primary & Community Care division provides clinical information technology (IT) systems for general practitioners (GPs) and commissioners. The Community Pharmacy division is an integrated community pharmacy dispensary and retail system. EMIS Health provides clinical software to customers across the healthcare sector. Its brand EMIS Care specializes in the delivery of diabetic retinopathy eye screening. more »

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Gfinity plc is a United Kingdom-based company, which is engaged in e-sports business. The Company is a provider and broadcaster of e-Sports competitions; both off-line events typically staged from the United Kingdom's e-Sports arena in Fulham, London and online events hosted on Gfinity.net. It is a provider of complete end-to-end e-Sports solutions, including the bespoke Tournament Builder Application, which is for Xbox One users, allowing e-Sports users to create and manage their own e-Sports competitions; Gfinity TV, which is the Company's own online television Player, giving the viewers control over their viewing experience, and Gfinity Tournament Client for personal computers (PC), which provides anti-cheat technology and also provides matchmaking and tournament entry for users. It hosts live tournaments. The Company operates a Website where subscribers gain access to information on the video games, watch streamed videos of competitions and themselves compete. more »

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14 Comments on this Article show/hide all

HHR 15th May 2 of 14

I totally agree with you about operating cashflow vs earnings. This quick measure is in the Zulu Principle and over the years it has really worked well for me in avoiding disasters.

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roddy10 16th May 3 of 14

I like to split the capex into 'maintenance capex' and 'expansionary capex'. Roughly, for a company with short duration assets, the depreciation ought to be equivalent to the maintenance capex. So if I subtract that from the capex number it gives a rough idea of how much the company is investing in future growth.

Obviously for longer duration assets one needs to make a guesstimate for how much 'inflation' adjustment needs to be made.

Maintenance capex SHOULD be the capex spent to maintain the economic earnings power of the business - rather than just a purely mechanical calculation. A classic example of this occurs when one considers computers - a business might have bought a computer 5 years ago for £1000. Today they have replace it with a £300 computer. For certain areas that is the appropriate replacement or maintenance capex. But in other parts of the business to maintain the same market presence the company actually needs to now spend £1500 (because competitions have moved on to new fangled advanced mobile devices etc) for the business to maintain the same economic earning power.

One of the issues I have had with retailers such as M&S is that I have felt for a long time that they have underinvested in their store assets --- it is hard to prove that from a balance sheet but a walk around some of their stores reveals old / non-functioning lights, floor tiles with marks or breaks, safety tape on the floor etc. All of these are, to me, signs of a business that has underinvested in 'maintenance' capex.

In the old days companies used to have 'sinking funds' to build up their reserves for major replacement purchases - I think that is still a useful way of thinking about maintenance capex.

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john652 16th May 4 of 14

In reply to post #476691

Hi HHR, in stockreport , what values do you check operating cash flow against?

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Santawani 16th May 5 of 14

Thank you Jack for some explanations on where to look and why. I find the cashflow statement the most difficult to follow of the three consolidated statements in company results.
I know to look for various measures, especially whether cashflow per share is out of kilter with earnings per share, but to be given some advice in plain English on different cashflows expected for different types of business as well as boring down a little deeper into what the different sections of the cashflow statement represent and how even these can be tinkered with is a big help.
It is all well and good being given information on what to invest in by advisers, but it's being able to fend for oneself when analysing a company that really matters to me.
It's the Why not the What that I enjoy learning!
P.S. Actually I enjoy learning the What as well, but I feel that, like 'cash', the Why is King!

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LongValue 16th May 6 of 14

It may be very crude and basic but taking the cash shown on the balance sheet and comparing it with the interest received on the cash flow statement can present a good guide as to the accuracy of the former. Fiddling the cash displayed on the balance sheet is not difficult to do. But it's more onerous fiddling the interest received. They may not tally precisely and, obviously, there are timing issues and fluctuations in interest rates. However, over the long-term, a correlation is probably to be expected.

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xcity 16th May 7 of 14

Agree with comments about maintenance Vs expansionary & checking against interest received.
Ditto personal checking where possible eg the estate for retail etc.
Important to remember that the balance sheet is on only one day and the average balance sheet may differ.

It's important to realise that you can't get it all from the figures. You need to understand what the figures are portraying, which means understanding how the business (& industry) functions and when something looks out of line. You either have that from experience or you can be taught some of it, but it's not something you'll often see on an investor site. That's one of the advantages of being able to see some of Paul's analyses.

PS I think it's misleading to look at the gross Restaurant (LON:RTN) figures. Vital to split it into components, and also vital to go much further back.
Similar issues to Tesco, which looked good on the surface but had been squeezing the pips too hard for too long. And M&S which had good cash generation but was underinvesting on its estate (quite reasonably imho - there wasn't enough evidence that investing in its estate would be profitable)

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xcity 16th May 8 of 14

It's also important to remember that mature businesses ought to be throwing off cash and immature businesses will need it. Some companies are a mix of the two.
The most important aspect of analysing a mature business is to work out the end game. What are the wind up costs? Will that generate money, will that eat money, when will it run out of road completely???
This the bit that Philip Green got completely wrong. His businesses were going to eat money at the end (pensions), property was becoming a cost not an asset and the cash flow was declining. He should have sole 3 or 5 years earlier when there would have been buyers at decent prices.

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HHR 16th May 9 of 14

In reply to post #476776

Hello John, I have printed below the quick comparison I make;


My confidence to invest in a share reduces proportionally with the number
of years in which Normalised eps exceeds Op. cashflow. One year is probably OK
but more than 3 is pretty much a red flag for me.

So for me, the above stockreport from Bloomsbury Publishing (LON:BMY) is fine as Op. cashflow
is only materially lower than eps in one year, and comfortably exceeds or equals
eps in the other years. That said if a company I already own throws in a
year of poor Op. cashflow then I will scrutinise particularly carefully for
other signs of weakness e.g. order backlog flat or ambiguous outlook statement.

Like other investing techniques I think Op. cashflow vs eps works well with other risk factors.

One situation where I have found it useful is high growth stocks/tips where management are portraying a breakthrough technology or hot retail concept. With these I might put them on the watchlist if I like the story but I don't invest until there is a record of good Op. cashflow vs eps. A good example of recent years where I avoided disaster using the screen is Tungsten (LON:TUNG).

It also sometimes works when 'official' growth stocks start to run out of puff. Here I use it with stocks I already hold e.g. Ted Baker (LON:TED) which used to have beautiful Op. cashflow vs eps that has turned patchy in recent years with debt rising and outlook statements becoming more and more laboured.

I should explain that my style of investing is primarily 'story' based and I get my investment ideas from  thinking about obvious global trends in conjunction with independent research of the company's products, competitive position and management track record - I don't have the type of brain required for detailed analysis of cashflow and balance sheets. That's why I find Op. cashflow vs eps so useful because it's a quick shortcut to eliminating loads of shares I might otherwise waste time or money on.

However I am sure some Stocko subscribers do have those accounting skills and as such can dig beneath the headline numbers and satisfy themselves as to whether a share has legitimate reasons for eps exceeding Op. cashflow. A good example of where the screen doesn't seem to work is Bioventix (LON:BVXP) (see below) which has been a fantastic investment for those who have the accounting skill to get behind the headline numbers.

Can anyone tell me in lay persons terms how/why bvxp manages to report rising eps, divi and sp with Op. cashflow consistently and significantly trailing eps?


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john652 16th May 10 of 14


You look like you've put Tungsten in twice. Before I noticed I thought, and those bloomsbury figures look good to you ! :) But I can see now if I look at bloomsbury. Thanks for taking the time to explain.

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HHR 16th May 11 of 14

In reply to post #476856

Thanks - duly corrected! I did say I didn't have the brain for accounts...…! Thanks again

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Gromley 16th May 12 of 14

In reply to post #476846


Interesting points.

With regards to Bioventix (LON:BVXP) , from a superficial look it appears to me that cash has been absorbed into working capital (although I'm struggling at first view to see just how Stocko have derived these numbers).

It is fairly common for a growth company to soak up cash into not just Capex but also working capital, so I would not see that as a red flag as such (although worth a check that the WC is proportionate). Just a quick superficial view, but as top line growth moderated in 2018, you'll see that OCF / share exceeded EPS, suggesting that indeed all is well with that measure.

I think you do have to contextualise the Cashflow with where a company is in it's growth cycle.

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LongValue 17th May 13 of 14

Even for the seasoned investor, this presentation given by Tim Steer, former UK equities fund manager for Artemis, at the recent UK Investor show is definitely worth viewing. He clearly and concisely highlights many of the red flags associated with failing companies and gives particular attention to the importance of cash. If saving money equates to making it then the time spent viewing this is probably one of the better investments one can make.


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doug2500 21st May 14 of 14

I'm not at all confident in this , and don't have time to double check right now but I think Bioventix (LON:BVXP) might be down to it's royalties where they are earned in a period but paid in cash in arrears, maybe twice annually I seem to remember?

Happy to be corrected, or even shot down for this as it's not my strong suit either.

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