There is something so tantalisingly tangible about cash that it is hard not to be tempted by the idea of investing in businesses that are flush with the stuff. And it's these types of businesses that my stock screen focuses on this week.
Despite the allure of cash, though, the use of cash-based valuation techniques is far less common than earnings-based analysis. Given that cash is the lifeblood of any business, this seems somewhat counterintuitive; even more so considering that earnings numbers are so easy to present in an advantageous light and even to out-right fiddle. But in the hands of a good finance director, the malleability of earnings numbers can actually be used to everyone's advantage by presenting a calmer and fairer narrative about a company's progress than that which could be gleaned from the rather lumpy and erratic figures found in most cash-flow statements.
Both earnings and cash-based valuation techniques have advantages and drawbacks. But perhaps one of the biggest advantages of looking at cash when it comes to stock screening is that it is a measure of value that the rest of the market does not pay very much attention to. Indeed, a slightly skewed approach to value hunting is often the best way to find real bargains.