4 companies I’d buy with high quality earnings 

Cash is king, so they say. This rings true when it comes to company earnings. On balance, it is better when company earnings are driven by cash earnings, as opposed to non-cash adjustments. One way of measuring the quality of company earnings is by dividing operating cash flow by net income. Here are four companies with solid cash earnings that are well placed to come out the other side of a market correction in good shape. Ltd (ASX: KGN) is an online retailer of a wide range of products. It sells electronics, homewares, and sports/leisure products. These include products under its own Kogan brand as well as major brands. The company also sells insurance, travel packages, and phone plans on its website 

Last year, reported a profit before tax of $5.7 million and a net operating cash flow of $10.7 million. With a price to earnings ratio nearing 200, investors are paying a premium for the company and its cash profits.  

Cimic Group Ltd (ASX: CIM)

Cimic Group operates a wide range of businesses in the construction, mining, mineral processing, operation/maintenance services and engineering industries. It also maintains public private partnerships through its Pacific Partnerships business. 

In 2017, Cimic Group reported a profit before tax of $967.2 million, and a net operating cashflow of $1,362.4 million. With the share price over 10% off its highs in December, the cash earnings at Cimic Group are looking increasingly attractive. 

APN Outdoor Group Ltd (ASX: APO)

APN Outdoor is an outdoor advertising company that operates in Australia and New Zealand. It offers advertising via digital and static billboards, as well as transit, rail and airport advertising.  

In the 12 months to December 2016 APN Outdoor reported a profit before taxes of $70.7 million, and a net operating cash flow of $66.3 million. With earnings to December 2017 due to be reported soon, it’s worth keeping an eye on the company. 

Challenger Ltd (ASX: CGF)

Challenger is an investment management firm focussed on providing funds management and financial services to Australians in retirement.  

Last financial year, Challenger reported a profit before tax of $497.8 million, and net operating cash flow of $1,597.2 million. Its cash profits have rewarded investors with an average annual increase of over 250% over the last 5 years. With a recent dip in the share price, it could be a good investment. 

Foolish takeaway  

Cash flow is important. Companies whose profits are primarily constituted of cash have high quality earnings. With strong cash profits,, Cimic Group, APN Outdoor, and Challenger are well placed to weather a market correction and come out the other side even stronger. This is especially so if management can put that cash to good use. 

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

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Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

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Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended ltd. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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