Page 7 - Evaluation - The Studies continued   [3 Go Back] 

The Cash Flow Study
        Cash Flow is a measure of the total amount money that moves through a Company, both coming in and going out. When a manufacturing company buys raw material for production, this is measured as a negative cash flow, while the revenue generated by selling the finish product is positive cash flow. Cash Flow not only includes income from sales and the direct cost of producing the goods or services that make up sales, but also includes sale of assets, the paying off or acquisition of debt and depreciation of plants and equipment, among other items. 
        Cash Flow varies considerably, especially between companies in different industries. There is little, if anything, to be gained from comparing the Cash Flow of companies that are in different industries. What you are looking for when you evaluate this fundamental data is consistent growth, while watching out for an unexplained decrease or worse, a quarter or two of negative Cash Flow. Either of these scenario may result in the Company having to borrow funds to maintain business activities, which will usually have a negative impact on the Stock price.

Cash Flow Study Control and Graph Elements

        A noticeable difference is obvious when the Cash Flow Study is first opened, rather than a single graph in the space below the tool bar, two graphs are displayed. The uppermost is designated 'Cash Flow Graph', while the lower is titled 'Cash Flow Multiple'. By default, the upper graph is active when the Study is initially opened, any adjustments in the controls will only effect the 'Cash Flow Graph', with the exception of the Years of History control. The Cash Flow data from the Data Entry page is represented by a dashed green line with green squares designating fiscal year changes. The graph elements in the upper graph are no different than those discussed earlier in the general discussion on 'Graph Elements'. To review this section, go to the Table of Contents above, and click 'Graph Elements' beneath the 'The Studies' heading.
        Clicking any open space in the lower graph will make it active while deactivating the upper graph. When the 'Cash Flow Multiple' (CFM), graph is made active, the label for the vertical Up/Down arrows changes from dark text to light gray, indicating that this control has been disabled and will not effect the 'Cash Flow Multiple' graph. Simultaneously the control grouping labeled 'CFM' makes the opposite change - going from light gray to darker text, indicating that this control is now active. The blue bars on the CFM graph are plotted using the Stock Price data, while the values used to plot the light green dashed line with medium green squares, are calculated by multiplying the Cash Flow figures used in the upper graph, times the Cash Flow Multiple. When this Study is first opened, Equity Evaluator centers the Cash Flow graph on the Stock Price graph by adjusting the CFM until centering is achieved. The projected Stock price values next to the red dots in the lower graph are computed by multiplying the projected Cash Flow figures from the upper graph, times the CFM (5.8), displayed below the 'CFM' label in the lower graph. This value can be adjusted using the associated Up/Down arrow.
        The active graph can be enlarged by clicking the Zoom control; having a label resembling a magnifying glass examining '+' and '-' symbols. This can be beneficial when the data being graphed and evaluated is quite consistent, as is the case with the Johnson Controls data.

Evaluating the Cash Flow Data
        Click any open space in the upper graph, then click the Zoom control to get a better look at the 'cash Flow Graph'. In trying to identify a trend in this graph, it seems logical to both reduce the Growth rate somewhat while lowering the vertical location of the Trend Line. This action will bring the Trend Line closer to the prevailing trend between 1995 and 1998, which seems reasonable assumption of the future trend.

        Click the Zoom control again to return the 'Cash Flow Graph' to it's original size, then activate the lower graph by clicking in a clear space on that graph. Click the Zoom control to enlarge the lower graph. The centering of the Cash Flow graph on the Stock Price graph looks good, especially in the last several years. So the CFM will be left at 5.8, although moving it a tad higher would not be imprudent.

Future Projections for the Cash Flow Study

        The Stock Price projection values used in the Future Projection calculations are the same Stock prices displayed in the lower 'Cash Flow Multiple' graph adjacent to the red dots. All other calculations are performed using the same procedure outlined in the 'Future Projection' description that can be found under the 'Individual Studies', 'Stock Price Study' headings in the Table of Contents.