Just as your pulse is checked during a routine physical, free cash flow is used as an indicator of a company's health. It equals the cash brought in from operations minus the money needed to pay the bills. Think about leftover money in your checking account after you pay this month's bills.

Investors and analysts see this leftover money as a gauge of a company's ability to perform. It is available for transactions such as handing out dividends and working on new products.

Some argue free cash flow is wrongly overshadowed by the emphasis often placed on earnings. Earnings numbers can be manipulated and don't always tell the whole story -- and earnings don't mean much if there's nothing left over after a company pays its expenses. Even if you bring in a six-figure salary, but no money left after paying the bills, are you in great financial shape?

You don't have to be Einstein to figure out free cash flow. To calculate the number, subtract the company's expenditures and dividends from its operating cash flow.

If the free cash flow is written in red ink, it doesn't necessarily signal curtains. This is common for young companies looking to grow. It also could be a result of heavy investments, which in the long run could be worth a standing ovation.

Home / Markets / Mutual Funds & ETFs

Monday, September 22, 2008

Buy Order

Roge Manager Sees Diageo as a Buy

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Christina Scotti

FOXBusiness

With the economy shakier than ever, Steven M. Roge is betting on vacations evaporating--but cocktail hour? Not a chance.

"We don't pay attention to macroeconomic themes or tech analysis. This fund goes anywhere, invests anywhere," said Roge, the portfolio manager of the Roge Partners Fund (ROGEX)--he invests in people that he feels have a knack for making money.

One stock that Roge sees as a good investment in this rough financial climate is Diageo (DEO), the largest spirit owner on the globe with eight out of the 20 top brands.

“These are terrific [brands] that stand the test of time,” he said. “Guinness will be around for the next 100 years. Tanqueray and Johnnie Walker will be here when my grandchildren are around."

Roge explains how Paul Welsh, the company's CEO, has done a good job of spinning off assets and realizing Diageo's strengths.

Diageo "used to own Burger King," said Roge, "and then Welsh came in and said, ‘this is a spirits company, so let's get rid of these side thoughts.’"

"We [also] like companies with healthy balance sheets," he continued, "and now it's finally paying off… We always liked businesses without a lot of debt…We like to see how much cash is in the register at the end of the night".

Roge Partners Fund did sell its stake in Diageo at one point because "the fundamentals of business evaluation got ahead of itself," said Roge. But recently, it has gotten back into the Diageo action, buying the stock while it was at 52- week lows this past July.

"[With] the economy taking a downturn, most shareholders said people wouldn't go for the Smirnoff, that they would pick a store brand instead. They were wrong," said Roge.

Diageo makes up 1.5% of ROGEX.