By studying how effectively a company converts profits into free cash flow, you can save yourself a lot of heartache and painful losses.
One of the simplest and best ways to test the quality of a company's profits (high quality earnings) and whether you think they are believable or not is to compare a company's underlying or normalised earnings per share (EPS) with its free cash flow per share (FCFps).
The free cash flow per share will show you how much surplus cash the company has left over to pay shareholders.
It can often be very different from EPS, even though it is supposed to tell you the same thing.
For many years, you want to see that free cash flow per share has been close to EPS.