Five Tips for Buying Cheap Stocks

Tip #3 – If you see too many quarters in the red, do not invest.

If a company consistently generates cash, that puts them in an enviable position. When times get tough (like the last couple of years), they have
a cushion to get them through the worst spots. They can make their principal and interest payments, and if they pay dividends, they can continue to
do so.

The best measure of whether a stock is a good cash generator is Operating Cash Flow, or OCF. OCF is simply a tally of the amount of cash a company
generates from its primary business. Unlike overall earnings, it is not money that comes from investments, buying real estate or borrowing.

What really concerns me is: 1) when a company does not have a reasonable amount of cash on hand, but even more importantly, 2) when the operating
cash flow account (you can find it on a company’s Statement of Cash Flows) is negative and trending downward.

You do have to be careful with seasonal or cyclical businesses. For instance, an amusement park operator in Ohio probably won’t have positive cash
flow during the first quarter of the year, as it’s a little too cold to ride roller coasters in January. So, it’s smarter to look at operating cash
flow over time — not just one quarter.

NEXT – Tip #4