Three Positive Cash Flows = Hot Stocks? Data Reveals the Truth

Are Three Positive Cash Flows Really Hot Stocks?

This is "common sense" many investors believe:

"Positive operating, investing, and financing cash flows = good company = hot stock"

But does data lie? Let's verify.

In the 2015-2025 Taiwan stock backtest:

• Three All Positive Strategy CAGR: 4.61%
• Operating Positive + Investing Negative: 12.07%
• Optimized Strategy: 25.51%

The result is surprising: Three all positive is actually the worst!

Note: The following are historical backtest results and do not represent future performance.

Market Phenomenon: Performance Differences Across Cash Flow Combinations

First, let's test all possible cash flow combinations:

Backtest the following cash flow strategies and compare their performance:

• All three cash flows positive
• Operating cash flow positive
• Operating positive + Investing negative
• Operating positive + Financing negative

from finlab import data
from finlab.backtest import sim
import pandas as pd
 
# Get cash flow data
營業現金流 = data.get('financial_statement:營業活動之淨現金流入_流出')
投資現金流 = data.get('financial_statement:投資活動之淨現金流入_流出')
融資現金流 = data.get('financial_statement:籌資活動之淨現金流入_流出')
vol = data.get('price:成交股數')
 
# Liquidity filter
vol_filter = vol.average(20) > 300 * 1000
 
# Strategy A: All three positive
三項全正 = (營業現金流 > 0) & (投資現金流 > 0) & (融資現金流 > 0) & vol_filter
 
# Strategy B: Operating cash flow positive
營業正 = (營業現金流 > 0) & vol_filter
 
# Strategy C: Operating positive + Investing negative (growth mode)
成長股模式 = (營業現金流 > 0) & (投資現金流 < 0) & vol_filter
 
# Backtest comparison
results = []
for name, position in [('三項全正', 三項全正), ('營業正', 營業正), ('成長股模式', 成長股模式)]:
    report = sim(position.loc['2015':], resample='M', position_limit=0.1, upload=False)
    stats = report.get_stats()
    results.append({
        'Strategy': name,
        'CAGR': f"{stats['cagr']:.2%}",
        'Sharpe': f"{stats['monthly_sharpe']:.2f}"
    })
 
pd.DataFrame(results)

Shocking Discovery: Three All Positive Ranks Last!

Three all positive achieves only 4.61%, the worst among all strategies!

Why Is Three All Positive Actually Bad?

From a financial analysis perspective, the signs of three cash flows have different meanings:

Key Insight:

• Positive Investing Cash Flow = Company is selling assets or reducing investment, may be decline signal
• Positive Financing Cash Flow = Company is borrowing or issuing shares, may be cash-strapped signal
• Three All Positive = Core business profitable, but shrinking scale and raising cash, not growth stock characteristics!

True growth stocks should be: Operating Positive + Investing Negative (profitable and actively investing in future)

Basic Strategy: Only Look at Operating Cash Flow

Since operating cash flow is most important, let's build a basic strategy:

Build an "Operating Cash Flow Positive" basic strategy:

• Entry condition: Operating cash flow positive
• Liquidity: 20-day average volume > 300 lots
• Monthly rebalancing

from finlab import data
from finlab.backtest import sim
 
# Get data
營業現金流 = data.get('financial_statement:營業活動之淨現金流入_流出')
vol = data.get('price:成交股數')
 
# Conditions
營業正 = 營業現金流 > 0
vol_filter = vol.average(20) > 300 * 1000
 
# Combine
position = 營業正 & vol_filter
 
# Backtest
report = sim(position.loc['2015':], resample='M', position_limit=0.1, upload=False)
report.to_html('baseline_report.html')

Basic Strategy Performance

Average performance, but plenty of room for improvement.

The VIP section continues with the full triple cash-flow strategy: 25.5% CAGR, Sharpe 0.80, plus strategy rules, the interactive backtest, and Python code.