Key

     The amount of cash per share to the market price per share provides a useful indication of the cash level of the firm. In addition to excluding financials and utilities, a filter requiring positive earnings from continuing operations for the last 12 months is specified as a minimum current profitability requirement, along with a minimum share price requirement of five dollars. A minimum market capitalization (shares outstanding times price per share) was included to help ensure a minimum level of trading liquidity.

     This screen originally looked for stocks with a cash level of at least 40% of the stock price.  This was changed to 30%, on of 2/11/07.  It is equally important to look at the financial obligations of the firm. A modification to the gross cash to price per share ratio is to subtract the short-term liabilities from cash to establish a net cash per share figure, which provides a better measure of the excess cash on hand. Dividing the net cash per share by the share price indicates how much of this "excess cash" is available on a per share basis.

     This screen originally looked for stocks with a net cash per share level of at least 40% of the stock price. This was changed to 20%, as of 9/18/07.  Many of the firms with positive ratios of cash to price per share have negative ratios once short-term liabilities are considered. Other firms may pass the screen because they do not maintain clear-cut divisions between current and long-term assets and liabilities. We look for companies that have had positive earnings per share for the past two consecutive quarters with year over year increases. 

Free Cash Flow
 

     Free cash flow is calculated by taking the cash flow from operations as reported on the firm's statement of cash flow and subtracting capital expenditures and dividends.  The screenin excludes financial firms. A screen requiring market cap greater than or equal to $50 million was included to help exclude small stocks with poor trading liquidity. 

     The screen then requires positive free cash flow for each of the last five fiscal years and the most recent 12 months. The ratio of stock price to free cash flow per share is a way to judge value. Comparing a company's ratio of price to free cash flow to those of other companies, industry norms, and historical averages provides some feel for relative value much like the traditional price-earnings ratio.

          Screening for firms with attractive levels of price to free cash flow provides a useful technique to highlight more mature value stocks worthy of further study. However, as with all preliminary screens, a study of the annual report and an understanding of the company, its products and its industry are required.

Information provided by AAII.