The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

because the “changes in working capital” entry is often the biggest cause of differences between net income and operating cash flow, this is an area that you’ll want to pay attention

the risk of not being in the market is high for anyone looking to build wealth over a long period of time.

Why? We need to be able to separate out businesses that are net users of capital—ones that spend more than they take in—from businesses that are net producers of capital because it’s only that excess cash that really belongs to us as shareholders.

don’t overlook the power of this simple test: If you can’t understand how a dollar flows from a company’s customers back through to shareholders, something’s amiss.

shows free cash flow along one side and ROE on the other side, and this matrix can tell you a great deal about the kind of company you’re analyzing.

inventory turnover by dividing a company’s cost of goods sold by its inventory level.

strategy is roughly twice as important as a firm’s industry when it’s trying to build an economic moat.6

Comparing cash flow from operations to reported earnings per share is another good way to get a rough idea of a firm’s profitability because cash flow from operations represents real profits.

(Note: Low-quality growth doesn’t imply that a company is cooking the books, merely that the growth rate isn’t likely to be sustained over the long haul.)

You don’t need to do detailed analysis at this point—just glance over sales and earnings growth rates and margins. The most important thing is to look at a variety of firms over a reasonably long time frame—at least 5 years and, preferably, 10.