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, Corn Products International (NYSE: CPO)

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

 

2011

2010

2009

2008

2007

Normalized Net Income $322 million $207 million $149 million $260 million $187 million

Source: S&P Capital IQ.

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. When a company runs a cash-flow deficit, money is pulled from savings, or raised through debt or equity financing:

 

2011

2010

2009

2008

2007

Free Cash Flow $37 million $235 million $440 million ($307 million) $81 million

Source: S&P Capital IQ.

Now we know how much cash Corn Products International 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 and assets, or to pay off debt.

Here's how much Corn Products International has returned to shareholders in recent years:

 

2011

2010

2009

2008

2007

Dividends $50 million $42 million $42 million $42 million $29 million
Share Repurchases $48 million $5 million $3 million $1 million $55 million
Total Returned to Shareholders $98 million $47 million $45 million $43 million $84 million

Source: S&P Capital IQ. 

As you can see, the company has repurchased a decent amount of its own stock. But combined with other rounds of share issuance, shares outstanding have been flat:

 

2011

2010

2009

2008

2007

Shares Outstanding (millions) 76 76 75 75 75

Source: S&P Capital IQ.

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 Corn Products International fall into this trap? Let's take a look:

Editorial

Source: S&P Capital IQ.

Not great. Corn Products repurchased a lot of stock in 2007 when shares were fairly high, almost none as they fell during the financial crisis, and came back with buybacks after shares rebounded. That's not what you see from managers with an eye for value.

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

Editorial

Source: S&P Capital IQ.

Shares returned 27% over the last five years, which increases to 37% with dividends reinvested -- a nice boost to top off already decent 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 Corn Products International's cash? Sound off in the comment section below.