Why cash flow from operations indicates profitability

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Cash flow from operations

A company’s income statement shows a “smoothed” view of a company’s performance. It doesn’t reflect pure cash transactions. It includes non-cash items like depreciation.

A balance sheet has some shortcomings—like the presence of non-cash assets like “Goodwill” and assets that are reflected at historical values.

These things make it difficult to draw conclusions about a company’s health.

However, a company’s cash flows are straightforward. They reflect actual transactions in cash for the period under review.

NOV - P8

What’s CFO?

As the name suggests, a company’s CFO is the cash it earns from its business operations—the sale of products and services. So, it’s one of the most powerful indicators of a company’s profitability.

Although it was somewhat volatile, National Oilwell Varco’s (NOV) CFO is firmly in the black. It’s improving. In 2013, NOV generated almost three times as much cash as it did in 2007.

An increase in cash is very useful for a company. It gives the company the ability to invest in future growth—projects. The company can also use the cash to reward shareholders. The company doesn’t have to look for capital from external sources.

In the next part in the series, we’ll discuss NOV’s cash flow from investments (or CFI). CFI is a major destination for a company’s cash. It can also be a source of cash.

Key peers and exchange-traded funds (or ETFs)

NOV operates in the oil and gas service and equipment industry. It’s tracked by the VanEck Vectors Oil Services ETF (OIH). OIH also counts NOV’s key peers—Cameron International (CAM), Halliburton (HAL), and Baker Hughes (BHI)—among its top five holdings.

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