In any case, understand why the company's cash flow is what it is. To calculate cash flow, take the company's net income and add back what it has taken in depreciation expenses and accounts payable. Then subtract capital expenditures, inventories, and accounts receivable. Balance Sheet Debt. The lower, the better.
Cash is always a good thing to have, but it is especially important to companies that are expanding.
Return on equity. This is a measure of net income relative to stockholders' equity. The higher, the better. Sometimes there is a difference between earnings reported to shareholders and taxable income reported to the Internal Revenue Service as a result of accounting differences. A company reporting higher earnings to shareholders through the use of deferred taxes should be carefully scrutinized, says Sommers.