Value Investing

Why do we care about the cash flow and what is it?

Value investors seek to pick stocks that are trading for less than their intrinsic or book value. Intrinsic value focuses on cash flows.

Fundamental analysis is used to evaluate the accounting data or “financials”, calculate the cash flows and, eventually, the intrinsic value.

Fundamental financial analysis principles were to the best of my knowledge best summarized by Vernimmen et al. 2022.

A standard financial analysis results can be summarized as follows:

A company must create wealth (sales trends, margin analysis). The value creation requires investments in capital employed (fixed assets, working capital) that must be financed (by shareholders’ equity or borrowings) and provide sufficient returns (return on capital employed, return on equity).

See example of this principle.