Financial Ratio that a Dividend Investor Should Not Neglect!

Would you invest into companies which are profitable, but without the corresponding operating cash flow?

Cash is king for a company. If a company does not generate sufficient cash flow despite beautiful profit, the company may have challenges in sustaining its operations or even pay salaries to employees. 

Dividend investors will need to be mindful of the above scenario. Before we invest our hard earned money, do assess if the company's profit is eventually backed by operating cash flow.

If a company makes RM100 million profit, how much of this profit translate into operating cash flow at the end of the day?

	2011	2012	2013	2014	2015
Operating cash flow (CFO) (RM mil)	195.3	180.2	225.6	236.2	295.1
Net Profit (RM mil)	181.3	207.3	217.6	198.2	214.1
CFO/Net Profit	107%	87%	104%	119%	137%

Source: Heineken Malaysia’s Annual Report

The example above depicts Heineken Malaysia's historical net profit and its operating cash flow (CFO) trend.

What can we dissect from the table above?

By looking at CFO / Net Profit metric, we can conclude that Heineken Malaysia's historical profit is backed by operating cash flow which is a positive sign. 

This CFO / Net Profit would have validated our assessment of a company's quality of earnings because there is no point to be profitable, but cash flow poor.

Hence, before we shoot our bullet, do assess the above metric in order to minimize our downside risk.

CFO/ Net Profit is surely one of the key ratios that a dividend investor should not miss!

Will elaborate more on other ratios in the future post:)