The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)

This is a series of articles describing how to quickly understand the key aspects of the annual report from a company that you have invested in with your hard earned money. This series started with an overview post on November 30, 2010.

2. Free Cash Flow

Many people believe that Free Cash Flow is the most important item in an annual report. After profitability and growth, it certainly bears your attention. Free Cash can be a very important tool for evaluating the appropriate stock price of a company.

To find the Free Cash Flow look for Net Cash Provided by Operating Activities. It is usually easiest to just do a search for the term “Net Cash” (I am assuming that you are reading the Annual Report in HTML format or PDF format).

There are no firm metrics that Net Cash needs to increase a certain percentage from one year to the next. In fact, this is why I don’t measure this metric on this site for my Confident Investor Rating. Cash almost by definition needs to go up and down from one year to the next. While it is usually bad for the cash to go negative, the fact that it doesn’t grow at 10% or some other rate is not exactly a bad thing.

The big thing in this metric on a quick analysis is to understand why it changed and was the change typical of the company in former years. Typically, this analysis is embedded in Item 7 of the Annual Report and you will find several paragraphs discussing the cash from the management of the company immediately following the reporting of the cash. Read that analysis and see if you think the changes are logical and help the company grow at the desired rate.

Here are the links to all 9 posts of the series:

  1. The 7 critical items to read first in an annual report in 20 minutes (Part 1 of 9)
  2. The 7 critical items to read first in an annual report in 20 minutes (Part 2 of 9)
  3. The 7 critical items to read first in an annual report in 20 minutes (Part 3 of 9)
  4. The 7 critical items to read first in an annual report in 20 minutes (Part 4 of 9)
  5. The 7 critical items to read first in an annual report in 20 minutes (Part 5 of 9)
  6. The 7 critical items to read first in an annual report in 20 minutes (Part 6 of 9)
  7. The 7 critical items to read first in an annual report in 20 minutes (Part 7 of 9)
  8. The 7 critical items to read first in an annual report in 20 minutes (Part 8 of 9)
  9. The 7 critical items to read first in an annual report in 20 minutes (Part 9 of 9)

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