Expert: Paul Henneman - 6/25/2003

Question
How does the size of a company's cash flow affect the value of its stock?

Answer
Thank you for your question! That is a broad question, but in essence cash flow alone means little more than positive (profitable) and negative (not profitable) and by how much. Changes in cash flow are perhaps at least as  significant in attempting to determine a valuation of a company going into the future.  A firm with negative but dramatically improving cash flow could look better in terms of valuation that a firm with positive but declining cash flow. Also, comparing this to other competing firms will give you an idea of how a specific company stacks up against its competitors, another important aspect.  Our research indicates that it is important to compare with similiar sized companies, so comparisons of changes in cash flow is perhaps more relevant.
My research firms models do incorporate cash flow, along with over a dozen other variables to determine valuations on publickly traded companies (www.ValuEngine.com). We strongly believe in looking at a wide array of data, of which cash flow is but one.

I hope this helps. Please feel free to respond to me directly at paul@ValuEngine.com if I can be of any further service.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.