Businessman Investor

Touching base with the rational business psyche of stock market investors

Monday, August 15, 2011

By Sheer Business Instinct, We Know that Cash is King

The Color of Money. Businessmen and entrepreneurs are instinctively money-conscious. They are very mindful of not only profits, but cash profits!
This is Part 1 of a Series.

I've always admired businessmen or entrepreneurs who have not a clue or idea about the stock market, but when they start speaking about their private companies, you can visualize the excellent fundamentals, and cash-generating power of their business models. They have a quick eye on the things that matter—they are mindful of large expenditures and always expect return benefits from cash outlays (such as an investment on an equipment and the potential savings it eventually brings). They hardly talk about accounting profits; instead, they focus on cash flow and return on investment. It’s reminiscent of that business-minded, typical Pinoy concern of "Magkano ba kikitain ko jan?" When you hear him ask that, you know he's concerned about how much cash he will get in the end.

But why has this Pinoy concept of kita been so obscured when it comes to actually evaluating companies listed in the stock market? Perhaps that is the challenge: being able to read, interpret, and translate conventional, corporate financial statements into simple, common-sensible information relevant to a cash-conscious, inquiring businessman investor—more than seeing the accrual side of things, we also try to ask: “Magkano ba talaga ang kinikitang pera ng kumpanyang ito?” and “Saan ba talaga nanggagaling at napupunta ang pera?”

While I’m a self-confessed advocate of tracking equity growth through earnings, and measuring value in book value terms (it’s the easiest to comprehend, communicate and explain, and that’s how I got started with fundamental analysis), my business consciousness eventually gravitated towards cash flow. By sheer instinct, everyone knows that cash is king. We are always so conscious about cash; it pays off the payroll, the bills, and that’s how we pay ourselves. We are always bias to collect and receive our sales/revenues in its cash form, and see it reflect on our bank passbooks. So how do we see this relevant cash flow in the financials of listed firms in the stock market? How do you perceptibly hear the cash register making that ca-shing! sound? How do you see that money-making faculty of businesses which makes you want to own them? Show you the money, you ask? I’ll show you the money... Continue to Part 2: Cash Qualifying the Income Statement

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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