How to use cash flow to be a better investor
Although not a one-measure-fits-all metric, understanding cash flow will help you make better investment decisions. Because at the end of the day, it's cash that really matters; it's what companies pay their bills and employees with; it's what they charge their customers, and it's what you use to buy shares, and ideally get more of when you sell those shares. A company's ability to increase that cash flow – especially free cash flow – on a per-share basis, is almost directly correlated with the long-term results of its stock price. The companies that grow it, become more valuable; the ones that don't, well, don't.
It's also worth noting that free cash flow doesn't work well for every kind of business. Companies like banks, financial service providers, and insurers make a good bit of their money from a mix of fees from operations and income from investments. It can be more complicated to measure their cash flows. As is often the case, don't count on any single metric being the one that tells you everything about any company.