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, C.R. Bard (NYSE: BCR).

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

 

2011*

2010

2009

2008

2007

Normalized Net Income $487 million $468 million $451 million $402 million $363 million

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 $656 million $587 million $571 million $466 million $502 million

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

Now we know how much cash C.R. Bard 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 in the bank, used to invest in other companies, or to pay off debt.

Here's how much C.R. Bard has returned to shareholders in recent years:

 

2011*

2010

2009

2008

2007

Dividends $65 million $67 million $65 million $62 million $60 million
Share Repurchases $927 million $1.1 billion $342 million $227 million $423 million
Total Returned To Shareholders $993 million $1.1 billion $408 million $289 million $483 million

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

As you can see, the company has repurchased a decent amount of its own stock. That's caused shares outstanding to fall:

 

2011*

2010

2009

2008

2007

Shares Outstanding (millions) 87 93 98 100 103

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 C.R. Bard fall into this trap? Let's take a look:

Source: S&P Capital IQ.

Management has been somewhat sporadic with buybacks, so this doesn't tell us much. Buybacks did spike after shares rebounded from their recessionary lows, but it's hard to tell if that's really indicative of management's long-term behavior. Given reasonable valuations in relation to earnings and cash flow, these buybacks have likely been a good deal for shareholders.

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

Source: S&P Capital IQ.

Shares returned 18% over the last five years, which drops to 14% without dividends -- a small boost to top off otherwise low 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 C.R. Bard's cash? Sound off in the comment section below.