Although some analysts have said that stock prices follow earnings, it may be more accurate to say that stock prices follow cash flow. Cash flow is more difficult to distort than earnings, which often have been misleading over the last few years.
Free cash flow is the amount of cash remaining after a company pays out all of its expenses, including investments. In other words, it’s the money left over after all the bills are paid. Companies with strong cash flow often can afford to pay out a dividend, buy back company stock, invest in needed equipment, or acquire businesses that could help long-term performance.
The simplest way to calculate a company’s cash flow is to start with net income, then add depreciation and deferred taxes. Numerous financial publications and services report on cash flow. Or, you can just look for companies that keep increasing dividends — those are companies with extra cash that they can pay out to shareholders.