Cash Flow in Investing

When you Invest in the following always remember that CASH FLOW is most important. You want to increase the spread or margin between revenues and expenses which increases your cash flows.

For Real Estate – Focus on Rents and Cash on Cash Returns and not the Cap Rates.

Analyze your market and focus on what your rents could be if you made modifications to the property. That is the revenue of the property and what you want to increase.

Then look at the expenses of the property and ways to minimize any of those. Maybe a capital expenditure to upgrade a feature will lower costs and increase cash flows in the long term. There are creative ways.

Then, most importantly, look at the CASH on CASH RETURN not just the CAP RATES. I want to know what is the actual cash return on the amount of cash I put into the property. This is the amount of money earned from my cash outlay. There are many other useful metrics such as ROE and ROI and we will discuss them later. Cash on cash is most important and the most simple and basic.

For Equities – Focus on FCF (Free Cash Flow) & FCF Yield and not just PE.

FCF is so important because it is all about the CASH! It is the CASH left over after paying all its operating expenses and capital expenditures.

FCF Yield is the Free Cash Flow Per Share / Current Share Price. It is a solid indicator of how financially stable a company is. It demonstrates how capable a company can repay and make good on all of its obligations.

Then I also look at EPS growth. I compare the pattern over the past year and look closely at the guidance going forward because it is about the future. EPS is more important for equities than just revenues and net profit because we are shareholders and we care about how much earnings we get per each share.

Rising growth (consistent), gaining market share, rising net incomes and revenues are all important. Guidance for future is very important for investing.

Margins. Increasing or maintaining margins are extremely important because that affects the cash flows. We want margins increasing ideally because that usually demonstrates the business is becoming more efficient or streamlining. As a result, they can increase that spread between revenues and expenses which should translate into more cash.

CASH is king.

For Businesses – Focus on Profit Margins and Net Profits and not just gross revenues.

Once again we want to increase that margin between inflows and outflows to increase profits and CASH. High revenues are great but how high are the expenses? Cost reduction is key and the lower we can keep those expenses without compromising growing revenues, the better. Profits. Net profits. Let’s keep them increasing.

Remember, it is about what you keep.

We want to keep generating increasing inflows and decreasing outflows to keep increasing bottom lines.

CASH is king.