Strong cash flow powers returns with these 2 firms

What makes a good business? I reckon the best answer to that question can be distilled to one word: cash.

Following the money

Can investing in businesses be as simple as that too? Businesses exist to generate cash, so let’s measure them on their ability to do that, to keep on doing it, and to do it more and more in the future.

Take Harry Potter publisher Bloomsbury Publishing (LSE: BMY) for example. The firm’s record of cash generation is good and the company has used some of it to pay a rising dividend:

Meanwhile, internet protocol TV set-top box provider Amino Technologies (LSE: AMO) also sports a decent record on cash generation and dividend payments:

Both firms have a proven ability to generate cash and pay dividends but can they keep on doing it?

Cash cows and digital expansion

The Harry Potter franchise continues to drive cash into Bloomsbury’s coffers but the firm has plenty of other good-selling titles all of which tend to weight earnings to the second half of its trading year.

In late October with the company’s half-year report, the directors said the business was trading in line with their expectations. City analysts following Bloomsbury anticipate earning for the year to February 2018 to remain flat and to increase by around 8% the year after that. Judging by the trading record, there’s a good chance that those earnings will be backed by robust cash inflow.

The company said it is targeting a number of new contracts from which rights and services income should flow in during the second half of the trading year. After that, the firm aims to deliver the platform and associated infrastructure to enable digital publishing growth. This includes the launch of Arcadian Library Online and Bloomsbury Popular Music, the latest two products in a growing digital range. Bloomsbury does indeed look set to keep on delivering and growing its cash flow over the medium term.

Organic and acquisitive growth

In February with the full-year results, Amino Technologies’ non-executive chairman, Keith Todd, reflected on a strong year’s trading for the firm. He pointed to an increased focus on sales execution, a broader product portfolio and the rapid integration of two businesses acquired in 2015.

He reckons the business momentum of 2016 looks set to continue during 2017 and the company can build long-term sustainable profitable growth. Such growth should show up in cash generation going by the firm’s past performance, so I’m optimistic that Amino Technologies can deliver a positive outcome for shareholders too.

Neither firm has an outrageous valuation. At today’s share price around 170p, Bloomsbury’s forward price-to-earnings ratio (P/E) runs just under 14 for the year to February 2019 and at 195p, Amino Technologies’ sits around 14 as well for 2018. Forward dividend yields are  4.4% for Bloomsbury and 3.7% for Amino Technologies. Right now, I think both firms could be worth your further investigation and due diligence.