Investor's Edge

This portfolio manager says investors should look at a company’s cash flow over earnings

Key Points
  • Patrick Kaser of Brandywine Global says investors should look to free cash flow over earnings when researching potential investments.
  • Free cash flow is more difficult to manipulate over net income.
This is why Patrick Kaser says to invest in the “most despised” stocks

Patrick Kaser, managing director and portfolio manager at Brandywine Global, believes free cash flow is a key determining factor in whether or not a company will be a lucrative investment. Earnings, however, are not always indicative of a successful company.

"There are many ways to manipulate earnings, earnings per share, GAAP, non-GAAP, but there's very few ways to maniupulate free cash flow," said Kaser, who heads the fundamental equity team and is the lead portfolio manager on the classic large-cap value strategy.

"So if we see a company with free cash flow, that's usually a good starting point to finding a good investment," he said.

Cash flow is the net amount of money being put into and out of a company.

Businesses can manipulate net income by excluding stock option expenses, demanding a one-time restructuring fee that becomes cyclical and companies can classify expenses differently, among other methods.

Free cash flow is net income minus capital expenditures, so basically what's left over to spend on growing the business or returning money to shareholders.

This money can be used for acquisitions, paying off debt or reinvestment.