Jim Glassman, Kiplinger

Welcome back to the financial exchange just not a filling in for Barry Armstrong and we were just speaking. With -- that's still in particular about the upcoming earnings season. Not a whole lot of optimism there and in particular you know if you look at the S&P 500 and really how it's performed this year. If you strip out the performance of apple it hasn't been nearly as impressive as folks think actually in a in a particular you're seeing apple right now. Back over 600 dollars percent it's it's really interesting look at apple right now. Makes up over three and a half percent of the S&P 500 the last two companies that where -- concentrated. Cisco and Microsoft and we know those of -- in the ten years since they reached that milestone so. Certainly something to consider if you are considering getting into Apple Stock at this point to joining us now on the line. We have Jim Glassman from -- and Jim how are you today. I'm great -- -- youth. Doing pretty well so what we're talking a lot about earnings but in an article that you've written recently. Yeah you mention that there's actually something else in a company's financial that you should be looking at in addition to earnings and that. Is cash flow and why should why should investors be concerned about cash flow. Well for the very same reason that if you owned a small restaurant or dry cleaner. What would count for you in your life would be. How much cash that company generated so sometimes earnings which are not that difficult to manipulate as we've seen have a lot less. Validity and importance to investors and the cash so that's what I wrote about. And so. In terms of breaking down cash flow and -- -- a little bit technical here but there are multiple types of cash flows for investors a look at so to get a little confusing so what should they focus on here actually. Well I I like people focus on two kinds of cash flow one is operating cash flow or just let's just call plain old cash flow. And that's where you take the earnings and you look at what are the things in the in the earnings compositions. That are not. Cache such as depreciation. Which is the right off of assets on Sunday you'll -- Okay so that's important but even more important and that is what is called free cash flow and that's what concerns warm bath and a lot of other. Sophisticated investors and and that this simple way to explain that is united got a business that's generating a lot of cash. But the question is how much can you actually put in your pocket. And if you have to keep re investing in the business that is to say buying new plant. You know new equipment new machines. That doesn't count against your profits but it's certainly counts against the dollar you're taking him out of your pocket. So what's left after he spent all that money and investment if you have to spend it is called free cash flow that's what really counts to them faster. So so taking that into account now. You know obviously there's there's probably if you warning signs of the company does not have good free cash flow so are there any examples of companies recently that if I had pour cash flow and and what does happen to them exactly. Well I think get a great example is -- Chesapeake now you know we we know that their students. Potential hanky banking going out just big yes. Which civic natural gas company back on its not just that if you have -- to the very carefully at just speaks free cash -- you would have sat down. That it wasn't very good and in some cases it was actually. Zero they were taking the money that they were earning. And they were using it to incest and to do that did such an extent that a lot of it really. Was not. It certainly didn't flow to the owners of the companies that's a that's a really good example of -- company where there was so much of the cash had to be put back into the company that it was not very I have. And by the same token are there's some situations where negative cash flow over a short period of time. Is actually good for company if they're investing that money properly. Yes and the example that I like to give -- Amazon. I think Amazon has been. Been doing a very good job managing it just because -- hackable you're right from the start. And what he has done lately. Has been to put a huge amount of his profits into infrastructure in the company. And what he's managed to do is create a terrific environment for customers. You know very fast. Very very clear. Terrific inventory. And that cost a lot of money absolutely and but the result is that he's grabbing more and more market sure -- economic. A more and more dominant players and sometimes it does make sense to make those investments and I realize. It's not necessarily easy for the average investor to make a distinction. Now it's certainly can be difficult but. I think you've given us a good place to start for a lot of folks in Jim I wanna thank you for coming on with us this morning thank you are hard that was Jim Glassman from Kipling.