What are the best stocks to buy for the long-term?

How to prepare cash flow statement in Excel

Here is a list of best stocks which one can buy with an objective of LONG TERM holding.

,In fact: I use this list for myself to unearth few good stocks from a heap of average ones.

,What is the strategy? How to identify best stocks trading in Indian stock market?,How to start?,Buying stocks of companies which has high sales, high net profit, or high dividend payout is not going to work.

,Not that these stocks are bad, but it also essential to do further checks.

,In this blog post, we will discuss what a long term investor must check in stocks before buying it.

,1.

WHICH ARE BEST STOCKS?Best stocks are ones, which represent a u201cgood businessu201d, and are also available at u201cundervalued priceu201d levels for investing.

,Good business: Which is good business? There can be several contributing factors, but what works best is u2018free cash flowu2019.

Read about blue chip stocks.

,Undervalued Price: What is undervalued price? For this one must know the u2018intrinsic valueu2019 of a stock.

When market price less than its intrinsic value, stock is undervalued.

Read about low PE stocks.

,A good business will always generate high free cash flows.

High free cash flow will eventually lead to high intrinsic value.

Check free cash flow based calculator.

,When intrinsic value is high, there are more chances to find it at undervalued price levels.

,So what is the takeaway from here? Look for stock with high free cash (FCF).

,See how good business builds its intrinsic value (use MS Excel to estimate intrinsic value),2.

WHICH ARE UNDERVALUED STOCKS?Suppose a stock is trading at a market price of Rs.

100/share.

Upon estimation, its intrinsic value comes out to be Rs.

120/share.

,As market Price is less than intrinsic value, stock is said to be undervalued.

,To identify best stocks, the essential ingredients are the following:,Free cash Flow (FCF), and,Intrinsic Value (IV).

Read more on IV formula.

,How to identify best stock? FCF will help you to estimate IV.

,Then one can compare the current market price with its estimated intrinsic value to check undervaluation.

Read more on undervalued stocks.

,3.

COMPLICATION TO IDENTIFY BEST STOCKSIt is not possible to accurately identify best stocks without knowing their free cash flow and intrinsic value.

,Does this understanding make best stock picking simpler? Yes and No.

,Yes, because we now know what stock parameter must be looked at to pick best stocks.

Otherwise we simply waste our time looking at less important stock metrics like financial ratios etc.

,No, because estimation of both u2018free cash flowu2019 and u2018intrinsic valueu2019 is a special skill.

Only gifted people can do it accurately.

,So how a common man, who knows nothing about stocks can identify best stock? It is a tough task, but I have a solution for it.

,4.

THE ULTIMATE SOLUTIONWhy Iu2019m calling it ultimate? Because the solution lies within us.

How?,Learn to estimate intrinsic value of stocks by self.

,From my experience, I can say three things about intrinsic value estimation:,First: Estimating an approximate intrinsic value of stocks can be done by anyone.

No special skill is necessary.

,Second: The more one practices estimating intrinsic value, the accuracy improves.

,Third: It is better to believe in the intrinsic value estimated by self, rather than buying stocks on others advice.

,I am sure these points are making sense, right?,But some might say that estimating intrinsic value estimation is tough u2013 how to learn it?,This is where my stock analysis worksheet can be helpful.

How? You can actually see for yourself the financial reports data being converted into intrinsic value.

,Reading this article, and using my excel worksheet can give huge clarity about intrinsic value estimation even to a novice.

,A few days of practice can clear a lot of cloud about intrinsic value.

,So lets process and try to learn how to estimate free cash flow and intrinsic value of stocksu20265.

WHAT BUILDS INTRINSIC VALUE?Before we get into the math part of intrinsic value, letu2019s understand what are the steps involved in estimation of intrinsic value.

,There are several methods of estimating intrinsic value of stocks.

One of the most reliable method is discounted cash flow model (DCF).

You can read this post to know more about it.

,But here what I will show you is a hybrid method of u201cdividend discount modelu2019 and DCF.

,In this hybrid model, there are three steps which ultimates helps us to build the intrinsic value:,Step #1 (FCFE): Calculate the present Free Cash Flow to Equity (FCFE).

,Step #2 (FCFE Growth): Forecast FCFE growth rate for next one year.

,Step #3 (Expected Return).

Quantify your u2018expected returnu2019 (say 5%, 8%, 12% etc).

,Step #4.

Calculate intrinsic value.

,5.

1 HOW TO ESTIMATE FREE CASH FLOW (FCFE)A stock must show a positive free cash flow (FCFE).

If not, then its intrinsic value will also go in negative.

,Only if the FCFE is positive, the stock may stand a chance to become undervalued.

,How to estimate free cash flow? Free cash flow formula is like this:,To estimate free cash flow, get the following values from the companyu2019s financial reports:,PAT: Open the u2018profit and loss accountu2019.

Note the numbers mentioned against u2018net profit after taxu2019.

,CAPEX: Open the u2018cash flow statementu2019.

Go to u2018Cash flows from investing activitiesu2019.

Note the numbers for u2018purchase and sale of capital assetsu2019.

,D&A: Open the u2018profit and loss accountu2019.

Go to the section where all u2018expensesu2019 are listed.

Note the numbers mentioned against u2018depreciation and amortisationu2019.

,Increase in Working Capital (WC): Open the u2018balance sheetu2019.

Note current assets (CA) and current liabilities (CL).

The formula for change in WC will be like this:Increase in CA = CA (Y2018) u2013 CA Y(2017)Increase in CL = CL (Y2018) u2013 CL (Y2017)Increase in WC = Increase in (CA u2013 CL).

,New Debt: Open the u2018cash flow statementu2019.

Go to u2018Cash flows from financing activitiesu2019.

Note the numbers for u2018purchase and sale of capital assetsu2019.

Note the numbers mentioned against u2018Proceeds from borrowingu2019.

,Debt Repaid: Open the u2018cash flow statementu2019.

Go to u2018Cash flows from financing activitiesu2019.

Note the numbers for u2018purchase and sale of capital assetsu2019.

Note the numbers mentioned against u2018Repayment of borrowingu2019.

,Gather these values in your excel sheet and calculate the free cash flow (FCFE) as indicated below.

,Note the u2018Formulau2018 column.

This way, one can arrive at u2018free cash flowu2018 numbers for a stock.

,Important points to note about free cash flow calculation:,FCFE must always be positive.

,If a company is in expansion mode, its Capital Expenditure (CAPEX) will be high.

High CAPEX often leads to lower FCFE.

But such companies will eventually yield higher FCFE in times to come.

The waiting time for FCFE to become positive can be 3+ years.

,Sudden increase in Current Assets (CA) compared to Current Liability (CL), will also lead to lower FCFE.

,A company relying too much on u201clong term debtu201d (year after year for longer duration of time) for enhancing its FCFE is not a good sign.

,Good companies rely less on debt.

Their major cash comes from PAT & provisions of D&A.

,5.

2.

HOW TO ESTIMATE FCFE GROWTH (G)?In the above step we have estimated the Free Cash Flow (FCFE) of a stock.

,Now we must estimate the expected rate at which the above FCFE will grow in next 1 year time (g).

,There are two ways to do it, easy way and the difficult way.

,Easy way: Assume it to be 5% (g = 5% p.

a).

Logic, in India the average inflation over a period of last 10 years is close to 7.

5% per annum.

Over a period of time, a good company will make sure that its Free Cash Flow (FCFE) must beat the inflation rate.

But this will happen only in long term.

In shorter time horizon (like next 1 year), assuming a smaller growth rate (less than inflation) is better.

Hence we can settle g=5%.

If you want, you can repeat the calculation for other g values like 3%, 6% etc.

,Difficult way: Calculate the FCFE for last 5 years.

See the trend and then make a safe assumption.

But I will suggest that, initially do not go the difficult way.

Downloading annual reports, searching data in the reports, preparing the excel sheet will take time.

If you afraid of losing the interest, begin with the easy way.

If after the calculation, the stock looks attractive, repeat the process using the difficult route.

Another option can be, use my stock analysis worksheet.

,5.

3 WHAT SHOULD BE THE EXPECTED RETURNS (K)?This step will be easy.

,But important Note: K must always be more than g.

Here as well, I will suggest you to use a rule of thumb (k= 8% per annum).

,Logic, in a long time horizon (5+ years), Sensex/Nifty can grown at a rate of 12% p.

a.

But at present we are making an assumption for next 1 year only.

,Hence a smaller rate of return (w.

r.

t.

12%) shall be assumed.

Hence I have settled for rate of return of g=8%.

,My suggestion will be to repeat the calculation with the following combination of u201cg & ku201d values:,5.

4 CALCULATION OF INTRINSIC VALUEWhat we have in hand till now?,FCFE.

,FCFE Growth Rate u2013 for next 1 year (g),Expected Return u2013 for next 1 year (k),With these values we can estimate the intrinsic value of any stock using a formula.

,What is the formula? It is called Gordon Growth Model.

,Intrinsic value = Dividend / (k u2013 g),But in our hybrid formula, we have replaced Dividend with FCFE.

This way our new formula looks like this:,Intrinsic Value = FCFE / (k u2013 g),What is the logic for this alternation?,In the Gordon Growth Model, dividend is taken in consideration as its u2018real earningsu2019 reaching the hands of investors.

In other words, it is the dividends which is creating real value for the shareholders.

,The real value generator (dividend) in turn is determining the intrinsic value of the stock.

,Similarly, free cash flow has powers to create real value for the shareholders.

How? In two ways:,One: A part of FCF can be used to pay dividends to the shareholders.

,Two: Another part can be reinvested back into the business to fund future growth (resulting in capital appreciation).

,The real value generator (FCF) in turn is determining the intrinsic value of the stock (using the hybrid formula),Examples of intrinsic value calculation:,6.

BEST STOCKS ARE UNDERVALUEDHow to check if the above stocks are undervalued or not? Just follow the below 2 steps:,Calculate IV/share (N): What is IV per share? Intrinsic value converted to per share value.

How to do it? Get the u2018number of shares outstandingu2019 of the company from its financial reports.

IV/share = Intrinsic value / N.

,Compare: Compare the calculated IV/share with the current market price of the stock.

If IV/share is more than current price, the stock is undervalued.

,Now matter how strong is the underlying business, a stock cannot become a good buy till its market price is u2018undervaluedu2019.

,7.

NECESSITY OF STOCK ANALYSISThere are 5,000+ stocks currently trading in Indian stock market (BSE).

Out of these, which are the best stocks?,The answer is not easy.

In fact, the answer is so unique that people who can find this answer have become millionaires.

,We common men can find this answer? Yes it is possible.

,But we have to follow a procedure.

We can use two basic screening criteriau2019s.

This will help to identify best stocks among ordinary ones.

,What is this screening criteria?,When people undertake the process of intrinsic value estimation of a stock, they are actually following these 2 screening criteria:,Screen #1: Remove fundamentally weak stocks.

How it is done? Only those stocks whose free cash flow is positive are fundamentally strong.

,Screen #2: Remove overvalued stocks.

How this is done? Only those stocks whose market price is less than its intrinsic value per share are undervalued.

,LIST OF BEST STOCKS TO BUY IN INDIA IN 2019(Updated on 13th-Aug-2019)Size: Size of Company in terms of its Market Capitalisation.

M.

Cap = Market Capitalisation in Rs.

Crore.

FCF: Free Cash Flow in Rs.

Crore.

FGR: Estimated Future Growth Rate for next 1Y (%).

EGR : Expected Growth Rate for next 1Y (%).

Valuation: Stock is undervalued or overvalued.

StocksBOTTOM LINEI hope this post showed you a shortcut of how to estimate intrinsic value and find best stocks to buy.

,But you must be wondering, u201chow to put this theory into practice?u201d,Well Iu2019ve something special for you (My stock analysis worksheet).

,This worksheet can convert all this theory into actionable steps.

,Check the screenshot of the report generated by my worksheet:,Kindly upvote my answer and follow me.

How to prepare a cash flow statement step by step pdf

How to Prepare a Statement of Cash FlowsCash Flow Statement | Explanation | AccountingCoachn,How to Prepare a Statement of Cash Flows Using the Indirect Methodn,nThe all-inclusive PDF file with screenshots and explanations: https://www.

zionsbank.

com/pdfs/biz_resources_book-4.

pdf

Format of cash flow statement

Hi there:,Here is a simplified projection of a financial model, including the so called u2018Three Way Financial Statementsu2019:,The important thing is to observe the correlation and links between the three statements: For example, line 63, Net Earnings, is transferred into the Equity section of the Balance Sheet (line 31).

Observe that this line contains the cumulative earnings for each year.

You can also observe how Dividends are withdrawed inf CF (line 83) and deducted from Equity (line 32).

Equivalent things occur with revenues,costs and expenses from IS being transferred into the CF.

,Regards,Josu00e9 Corona

How to prepare cash flow statement from balance sheet

How to Prepare a Statement of Cash FlowsCash Flow Statement | Explanation | AccountingCoachn,How to Prepare a Statement of Cash Flows Using the Indirect Methodn,nThe all-inclusive PDF file with screenshots and explanations: https://www.

zionsbank.

com/pdfs/biz_resources_book-4.

pdf

Cash flow statement example questions and answers

When analyzing financials of companies, I always look at the cash flow statement first and spend the most time on that compared to the other statements.

,The Income Statement: Answers how are we doing as a business.

It starts with revenue minus expenses to get net income.

,The Balance Sheet: Is a financial snap shot at a point in time.

In other words, at a given date, what were the Assets, Liabilities and Owners Equity of the company.

,For the Cash Flow Statement: the amounts of cash and cash equivalents entering and leaving a company.

It answers the questions of how are operations running, where is the money coming from and how is it being spent.

,Ill give two examples that will help you understand why I prefer the cash flow statement to analyze companies: ,1.

There is freedom within the Income Statement and Balance Sheet to choose how you treat certain transactions.

This creates a situation where two otherwise similar companies have financial ratios that tell a different story.

For example, I can decide if Id like to capitalize (treat an expense an asset and depreciate it over time) an asset on the balance sheet or if Id like to expense it on the income statement.

If I expense it, my net income is lower and if you just compare income statements, I appear to be much less profitable.

,2.

Depreciation schedules are subjective as well.

You can choose a more conservative schedule which wil show more depreciation expense earlier on in the assets life or you can have a depreciation schedule thats the same expense each month.

The depreciation expense appears on your income statement each month as a subtraction from revenue.

Two companies that choose different schedules will have different income statements and balance sheets.

,On the cashflow statement, you see the actual cash that went in and went out of the business all in one place and the subjective decisions that each company can have do not matter.

Heres an example: When you are creating a cash flow statement using the indirect method (most popular and easiest to understand method), the first item at the top of the cash flow statement is called Net Income.

The next thing you to do that Net Income figure is, Add back non-cash transactions.

So look at the depreciation example we talked about above.

The depreciation is a non cash expense because you dont pay anyone a depreciation expense.

So no matter which depreciation schedule I choose, I have to add back my depreciation expense to Net Income.

If youre thinking, the depreciation expense that is the highest will add more money to net income than the other company, then youre correct.

The company though that has more depreciation expense though, started with a lower net income figure so each company appears to be even on the cash flow statement.

,For example in a sample cash flow statement it might look like this: , Company A Company BNet Income 200 100nDepreciation 50 150,Cash From Operations $250 $250,nIn conclusion, cash flow statements take the subjectivity out of the financial statements and give a more level playing field.

Cash flow statement PDF

How to Prepare a Statement of Cash FlowsCash Flow Statement | Explanation | AccountingCoachn,How to Prepare a Statement of Cash Flows Using the Indirect Methodn,nThe all-inclusive PDF file with screenshots and explanations: https://www.

zionsbank.

com/pdfs/biz_resources_book-4.

pdf

Cash flow statement direct method

What the direct method and the indirect method cash flow statement have in common, is that they have three main categories: Cash From Operating Activities, Cash From Investing Activities and Cash From Financing Activities.

Together these form the net increase or decrease in cash during the year.

You then sum that net increase or decrease with the cash balance at the beginning of the year, and you should reconcile to the cash balance at the end of the year.

,Accounting statement FAS95 has examples with numbers of the direct method and the indirect method .

The difference between the methods is purely in the section called CFOA, or Cash From Operating Activities.

In Cash From Investing Activities, the main line items are capital expenditures, proceeds from selling factories or buildings, and business acquisitions or divestments.

In Cash From Financing Activities, the main line items are dividends paid, shares issued or repurchased, and issuances or repayments of debt.

,Hereu2019s the example from FAS95 on reporting CFOA using the direct method.

You start off with cash received from customers of 13.

9 billion (a positive number, cash inflow), you deduct cash paid to suppliers and employees 12 billion (a negative number, cash outflow), and then account for smaller items such as interest paid 220 million and income taxes paid 325 million.

Total net cash provided by operating activities, calculated using the direct method is 1.

4 billion, which should be the same if you calculate it by using the indirect method.

,Hereu2019s the example from FAS95 on reporting CFOA using the indirect method.

When you use the indirect method, you start off with net income, or net profit.

In this example, net income is 760 million.

Next step in the indirect method is to look for any non-cash items from the P&L.

In this example, the main non-cash item is depreciation and amortization, which is 445 million.

You deducted depreciation as an expense in order to report the correct amount of EBIT and profit before tax in the income statement, and to calculate the correct amount of corporate income taxes.

For cash flow purposes, you will have to add back that same amount of depreciation.

The next four items work in a similar way: you make adjustments for items that are treated differently when you recognize profit or costs versus when you record cash receipts or cash disbursements of a company.

A key section of the indirect method is: increases or decreases of working capital items on the balance sheet.

If accounts receivable goes up, then cash goes down, in this case 215 million.

If inventory decreases, then cash goes up, in this case 205 million.

Etcetera.

Total net cash provided by operating activities, calculated using the indirect method is 1.

4 billion.

Cash flow statement questions

Building a Cash Flow StatementStep 1: Remember the Interconnectivity Between P&L and Balance Sheet.

.

.

.

,Step 2: The Cash Account Can Be Expressed as a Sum and Subtraction of All Other Accounts.

.

.

.

,Step 3: Break Down and Rearrange the Accounts.

.

.

.

,Step 4: Convert the Rearranged Balance Sheet Into a Cash Flow Statement.