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, Schlumberger (NYSE: SLB ) .

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

	2011*	2010	2009	2008	2007
Normalized Net Income	$3.8 billion	$2.8 billion	$2.6 billion	$4.3 billion	$4.1 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:

	2011*	2010	2009	2008	2007
Free Cash Flow	$2.4 billion	$2.6 billion	$2.9 billion	$3.2 billion	$3.4 billion

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

Now we know how much cash Schlumberger 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 either be stashed in the bank, used to invest in other companies, or used to pay off debt.

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

	2011*	2010	2009	2008	2007
Dividends	$1.3 billion	$1.0 billion	$1.0 billion	$1.0 billion	$0.8 billion
Share Repurchases	$2.8 billion	$1.7 billion	$0.5 billion	$1.8 billion	$1.4 billion
Total Returned to Shareholders	$4.1 billion	$2.7 billion	$1.5 billion	$2.8 billion	$2.2 billion

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

The company has repurchased a decent amount of its own stock. But combined with share issuance (in part to finance acquisitions), total shares outstanding have increased over the past five years:

	2011*	2010	2009	2008	2007
Shares Outstanding (Millions)	1,355	1,250	1,198	1,196	1,188

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 Schlumberger fall into this trap? Let's take a look:

Source: S&P Capital IQ.

Sure enough, Schlumberger repurchased a large amount of stock in 2007 and 2008, when shares were fairly high, and pulled back sharply in 2009, when shares were cheap. Whether this was a prudent use of cash as it looked like the economy was about to implode, or a classic example of buying high and panicking low, is up for debate. In general, it doesn't appear management has been the most astute buyer of its own stock.

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

Source: S&P Capital IQ.

Over the past five years, Schlumberger shares returned 29%, which drops to 22% without dividends -- a small 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 coming in the door, and how much cash is coming in the door isn't as important as what management does with that cash. Remember, you, the shareholder, own the company. Are you happy with the way management has used Schlumberger's cash? Sound off in the comments section below.

Add Schlumberger to My Watchlist.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter, where he goes by @TMFHousel. Motley Fool newsletter services have recommended buying shares of Schlumberger. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.