In the quest to find great investments, most investors focus on earnings to gauge a company's financial strength. This is a good start, but earnings can be misleading and incomplete. To get a clearer understanding of a company's ability to earn money and reward you, the shareholder, it's often better to focus on cash flow. In this series, we tear apart a company's cash flow statement to see how much money is truly being earned, and more importantly, what management is doing with that cash.

Step on up, ExxonMobil (NYSE: XOM).

The first step in analyzing cash flow is to look at net income. ExxonMobil's net income over the last five years has been impressive:

Year

2011*

2010

2009

2008

2007

Normalized Net Income

$43.8 billion

$32.2 billion

$21.4 billion

$49.7 billion

$43.3 billion

Source: S&P Capital IQ. *12 months ended Sept. 30.

Next, we add back in a few non-cash expenses like the depreciation of assets, and adjust net income for changes in inventory, accounts receivable and accounts payable -- changes in cash levels that reflect a company either paying its bills or being paid by customers. This yields a figure called cash from operating activities -- the amount of cash a company generates from doing everyday business.

From there, we subtract capital expenditures, or the amount a company spends acquiring or fixing physical assets. This yields one version of a figure called free cash flow, or the true amount of cash a company has left over for its investors after doing business:

Year

2011*

2010

2009

2008

2007

Free Cash Flow  

$27.6 billion

$21.5 billion

$5.9 billion

$40.4 billion

$36.6 billion

Source: S&P Capital IQ. *12 months ended Sept. 30.

Now we know how much cash ExxonMobil is really pulling in each year. Next question: What is it doing with that cash?

There are two ways a company can use free cash flow to directly reward shareholders: dividends and share repurchases. Cash not returned to shareholders can be stashed away in the bank, used to invest in other companies, or used to pay off debt.

Here's how much ExxonMobil has returned to shareholders in recent years:

Year

2011*

2010

2009

2008

2007

Dividends

$9 billion

$8.5 billion

$8 billion

$8.1 billion

$7.6 billion

Share Repurchases

$22.4 billion

$13.1 billion

$19.7 billion

$35.7 billion

$31.8 billion

Total Returned to Shareholders

$31.4 billion

$21.6 billion

$27.7 billion

$43.8 billion

$39.4 billion

Source: S&P Capital IQ. *12 months ended Sept. 30.

As you can see, the company has been a prolific buyer of its own shares. That's caused its shares outstanding to fall:

Year

2011*

2010

2009

2008

2007

Shares Outstanding (millions)

4,933

4,885

4,832

5,194

5,557

Source: S&P Capital IQ. *12 months ended Sept. 30.

Now, companies tend to be fairly poor at repurchasing their own shares, buying feverishly when shares are expensive and backing away when they're cheap. Does ExxonMobil fall into this trap? Let's take a look:

Xombuybacks

Source: S&P Capital IQ.

ExxonMobil's share buybacks fell in 2010, when its stock happened to be fairly cheap. Whether this was a prudent move by management to shore up cash levels as it looked like the economy was heading back toward recession is up for debate. In general, I think Exxon has been a fairly good purchaser of its own stock. Shares haven't looked particularly expensive in recent years, and management hasn't been shy about repurchasing shares by the truckload.

Finally, I like to look at how dividends have added to total shareholder returns:

Xomreturns

Source: S&P Capital IQ.

Over the past five years, ExxonMobil shares have returned about 32%, which drops to 19% without dividends -- not a bad boost to top off already decent share performance.

To gauge how well a company is doing, keep an eye on the cash. How much a company earns is not as important as how much cash is actually coming in the door, and how much cash is coming in the door isn't as important as what management actually does with that cash. Remember, you, the shareholder, own the company. Are you happy with the way management has used ExxonMobil's cash? Sound off in the comments section below.