Bottom up approach.

Cashflow, Cashflow and Cashflow.

Cashflow is the heartbeat of a company.  More importantly, a surplus of  inward cashflow to outward, which can be as operational, investing or financial. However, operation activity inward cashflow is most significant, generated from the sales of the company’s good or services provided. For investing cashflow, the company can only sell whatever assets in their balance sheet to raise cash; for financial, a company can only raise cash until shareholders or credit providers are willing to provide.

Other than looking at the quality of cashflow, these are the characteristics of a company I look for:

Business traits

  1. Businesses with moat – These businesses have low-cost advantage, high switching costs, intangible assets in monopoly, patent, licenses and brand names, and network effects.
  2. Rental-like businesses – Company that sell stuff that customer will require to keep buying or using.
  3. Company focuses on their core competencies. Companies should focus on a business that they have competency in and continue to yield from the existing value drivers. Many times when a company is flushed with cash, they venture either through acquisition or starting a business which ends up as diworsification, instead of diversification.
  4. Provide customers with good experience – Only companies that provide good product or services will be able to attract returning customers.

Accounting traits

  1. High cashflow – A high ops-cashflow to revenue margin suggests a good business with little credit to customers. This positive trait can be magnified even further when maintenance capex cashflow, ie the amount of money used to maintain the revenue is low.
  2. High ROIC – ROIC is the measurement of a company’s capital efficiency. 
  3. High visibility in earnings.

Management traits

  1. Management which gives out excess cash as dividends.
  2. Management which own up to their mistakes.