FOCUS ON THE CASH

"Remember cash is a fact, profit is an opinion." Al Rappaport

"Cash flow, not reported earnings, is what determines long-term value." William Thorndike

"Great fundamental investors focus on understanding the magnitude and sustainability of free cash flow." Michael Mauboussin

“If you don‘t have the free cash flow, you don‘t have anything.” Leon Cooperman

"Net income without cash is not necessarily net income." Henry Singleton

"To us an asset is only an asset if it generates free cash flow." Jeffrey Ubben

"We are trying to look at businesses in terms of what kind of cash can they produce, if we’re buying all of them, or will they produce, if we’re buying part of them." Warren Buffett

“When I think of ownership of a business we are basically counting cash as it is earned, which is typically when the product or service is delivered. Investing is simply the counting of all that cash and discounting that cash stream at an acceptable rate to determine what the investment is worth and buying that stream as a discount to what it is worth.” Christopher Begg

“We want to basically count the cash. For example many people want to look at free cash flow. They will not deduct capital expenses from it. So this goes back to the Patel, Dhandho mentality which at the end of the day is ‘what’s in the register?’ So what I always ask myself is what’s in the register the end of the year after everything’s done. You’ve paid the taxes and you have the capital expenditures. What’s in the register at the end of the next year and the year after? In general that is a metric that I use - what’s in the register? Because different businesses are different, you might have to get to that register number in different ways. I’m focused on the idea that you have some black box that generates some cash. What is that cash and what is the consistency of that cash over time? Then we can put a multiple on it and take it from there. So that’s generally how I go about it.” Mohnish Pabrai

“We quantify scenarios above and below our base case, but the base-case valuation typically looks two years out at our estimate of free cash flow, then applies a forward multiple we believe is reasonable.” Adam Weiss

"Our valuation methods are heavily focused on free cash flow (which we define as cash that can be returned to investors or reinvested in the business)." Zeke Ashton

“There is a class of business where the eventual ‘cash back’ part of the equation tends to be an illusion. There are businesses like that – where you constantly keep pouring it in and in, but where no cash ever comes back… struggling with a business that never produces any cash – whether its winning or losing as a matter of accounting – is no fun. You should seek businesses that just drown in money if they just pause for breadth.” Charlie Munger

“We try to stick with companies that are gushing cash flow. We don’t really think of value as low price to book or low price to earnings. We are actually valuing businesses based on cash flows like a private equity investor would. We are valuing businesses based on cash flows." Joel Greenblatt

“I think the job of a security analyst is to take the reported GAAP earnings of a business and translate them into what Buffett calls owner earnings. I call them economic earnings. The next step is to assess and understand the durability of those earnings. Fundamentally, what you’re looking for is how much cash the business can generate on a recurring basis over a very long period of time.” Bill Ackman

“Earnings are a by-product of many assumptions and choices made by management. The treatment of reserves, choice of a discount rate on contingent valuations, assumed pension returns, and method of funding lead to a result that can be either significantly overrated or underrated.” Todd Combs

“We are looking at companies that produce a lot of free cash flow. Kind of a simplistic analogy would be an individual earning and saving a lot of his earnings each year, putting it into a bank account or into an investment portfolio, and then finding out after a number of years that he has a serious net worth.” David Polen

“The nature of the business and its ability to generate reasonable amounts of free cash flow – even in stressful environments – in relationship to price paid is the most important factor.” Bruce Berkowitz

"The future value of all the future cash flows of the company is ultimately the only thing we care about.” Andrew Brenton

"I want to see if a company is generating cash or simply accounting earnings." Ralph Wanger

"We try to find out the free cash-flow per share the company is generating, and we value businesses based on that rather than GAAP P/E numbers.” Chuck Akre

“We’re essentially trying to pay a low-teens multiple of what Warren Buffett defined in his 1986 Berkshire Hathaway shareholder letter as owner earnings – free cash flow before growth related capital spending – for businesses we believe can compound our capital at a mid-teens rate or better.” Ira Rotherberg

"Our attitude toward cash generation and asset management came out of our own thought process. It is not copied. After we acquired a number of businesses we reflected on aspects of business. Our own conclusion was that the key was cash flow. You can't pay bills with book-keeping profit." Henry Singleton

“Not every idea fits this, but we basically estimate free cash flow – EBITDA less maintenance capital spending, cash taxes and cash interest, over whatever time horizon we can reasonably assess, putting a reasonable multiple on that in the out year. We’re shooting for situations with double-digit free-cash-flow yields. We think with those we have a very significant margin of safety.” Jason Stankowski

"Investments throw off cash flow for the benefit of owners, speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market.” Seth Klarman 

“The most important metric we look at is probably Enterprise Value to free cash flow.” Eric Rosenfeld

"I focus on the free cash flow, and assess its durability and likely future growth." Allan Mecham

“What’s important to us is the cash flows in the next couple of years, what multiple on Enterprise Value (EV) that we are paying based on EBIT and EBITDA.” Alex Roepers

“We value companies based on normalised free cash flow, where we strip out the quirks of GAAP to arrive at the excess cash a business generates – or could generate – after reinvesting enough to maintain current capacity and competitive advantages but before investing for growth.” Danton Goei 

“Good companies will generate free cash that is around the same level as net income, give or take. When that isn’t the case, it’s a flashing red signal to us to look more closely at the quality of the earnings.” Kevin Holt

"We like free cash flow [the amount of money available to a company after operating costs and capital expenditures]. At the end of the day, you want to see that cash has been generated that can be spent on dividends, buybacks, mergers, or reinvestment in the business." Larry Pitkowski

"Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business." Warren Buffett

“We want to know how much cash is coming back to investors, how predictable that cash flow is going to be and how would I value that relative to the risk-free rate of return. So we’re trying to look at a business as you would look at a bond or as a private equity investor might look at a private entity.” Chris Mittleman

“At Oakmark, the key determinant of business value is the free cash that a business generates from its asset base.” David Herro

"We approach valuation from a perspective similar to that of a 100% owner – what are the excess cash flows we will receive in the future and how certain are we about their durability?" Wally Weitz

"My father and grandfather were in the construction business, so after my exposure to that I've never been comfortable looking at anything other than cash flow to try to fundamentally understand a business. Over time I've refined that down to discretionary cash flow, what's left over after what we consider maintenance capital spending and dividends." Micheal Cook

"We want to build a portfolio of undervalued businesses that are good companies that generate cash flow." Dave Samra

"A primary determinant of which stocks become a core holding in the portfolio and receive a higher capital allocation are the predictability and reliability of the company's cash flows." Alex Roepers

“We are interested in businesses that provide cash rather than use up cash. We’re willing to have them use cash, if what they use will produce high enough returns. But we’ve got this bias toward things that throw off cash.” Warren Buffett

"We use many different valuation methodologies, but the most common at Maverick is to compare sustainable free cash flow to enterprise value." Lee Ainslee

"I tend to focus on free cash flow. We basically looked at the amount of cash that the business could return to us as shareholders and valued that." Glenn Greenberg

“How do I determine the discount? I usually focus on free cash flow and enterprise value (market capitalization less cash plus debt). I will screen through large numbers of companies by looking at the enterprise value/EBITDA ratio, though the ratio I am willing to accept tends to vary with the industry and its position in the economic cycle." Michael Burry

“I wouldn’t look for a single metric like relative P/Es to determine what — how — to invest money. You really want to look for things you understand, and where you think you can see out for a good many years, in a general way, as to the cash that can be generated from the business. And then, if you can buy it at a cheap enough price compared to that cash, it doesn’t make any difference what the name attached to the cash is.” Warren Buffett

"Ultimately, in one form or another, cash flow is all companies have to distribute to investors, and cash flow is the only thing investors can spend. Ultimately, investment success depends on how much an investor pays for the cash flow a company generates." Andy Redleaf

"If you attempt to assess intrinsic value, it all relates to cash flows. The only reason for putting cash into any kind of an investment now is because you expect to take cash out." Warren Buffett

“We and other investors today tend to focus on cash flow after capital expenditures (free cash flow), instead of earnings, to evaluate the investment merits of a business. One advantage of this approach is that it helps shortcut a good many games that management can play in reporting profits. Moreover, earnings are seldom synonymous with cash available for shareholders, and it is the latter that should matter to investors. It has always struck me as curious that the first questions asked by a private investor are, how much money must I put up, how much cash will I get back, and how fast? Why should investors in publicly traded stocks ask different questions?” Glenn Greenberg

“As a young(er) investment analyst, I once met with the CFO of a large US West Coast bank. I was anxious beforehand, it is not easy for a young man to hold his own with a senior executive of any business, let alone one as opaque as a bank. I forget which question I asked, no doubt it was cloaked in the latest investment buzzwords of the day but, at any rate, it was so overly complicated that it elicited the following response, ‘Look, son, at the end of the day it is all about cash-in, and cash-out’. Oh dear! Well, the put down could have been worse, and probably deserved to be worse. That was a lesson learnt: keep it simple, it is all about cash-in, and cash-out.” Nick Sleep

“Some companies generate way more cash flow than earnings, and some do the opposite (generate way more earnings than cash flow). The higher your ratio is of cash/earnings the better off you are. This can be accomplished in numerous ways, but one of the more common is to collect cash from your customer ahead of your accounting driven revenue-recognition. Cash is king, and if your cash margin is better than your accounting net income margin, you are golden. The opposite is also true.” Bill Gurley

“As we seek to find a good business and understand it, one thing we pay close attention to is its free cash flow—rather than net income, a metric that does not, among other things, take into account capital spending and working capital.” Steve Romick

“Our acquisition preferences run toward businesses that generate cash, not those that consume it… However attractive the earnings numbers, we remain leery of businesses that never seem able to convert such pretty numbers into no-strings-attached cash.” Warren Buffett