Crunching profit numbers and evaluating surprises might appear a good option in the ongoing reporting cycle but these do not ensure that the profits are being efficiently channeled to the reserves to fund future growth. Because even a profit-making company can have a deficiency of cash flow and might go bankrupt while meeting its obligations.

Therefore to ensure investing in the right stocks, one must look at a company’s proficiency in generating cash flows. This is because cash is the most indispensable factor for any company. It gives strength and vitality and is the key for its existence, development, and success.

In any business, cash moves in and out, it is net cash flow that indicates how much money the company is actually generating or burning. Having positive cash flows indicates enhanced liquidity, giving the company more power for debt repayment, expenses, dividend payouts, stock buyback and finally reinvestment in business. On the other hand, negative cash flow implies that a company’s liquid assets are decreasing, resulting in reduced flexibility to support these moves.

However, having a positive cash flow merely does not secure a company’s future growth. To ride on the growth curve, a company must have its cash flow increasing because that indicates management’s efficiency in regulating its cash movements and less dependency on outside financing for running its business.

Therefore, this earnings season and beyond, don’t look at profits only before picking stocks. Make sure to look for stocks with dependable and increasing cash flows.

Screening Parameters:

To find stocks that have seen increasing cash flow over time, we ran the screen for those whose cash flow in the latest reported quarter was at least equal to or greater than the 5-year average cash flow per common share. This implies a positive trend and increasing cash over a period of time.

In addition to this we chose:

Zacks Rank 1: No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance.