# What Maxim Does With Its Cash

Before you go, we thought you'd like these...

In the quest to find great investments, most investors focus on earnings to gauge a company's financial strength. This is a good start, but earnings can be misleading and incomplete. To get a clearer understanding of a company's ability to earn money and reward you, the shareholder, it's often better to focus on cash flow. In this series, we tear apart a company's cash flow statement to see how much money is truly being earned and, more importantly, what management is doing with that cash.

Step on up, Maxim (NAS: MXIM) .

The first step in analyzing cash flow is to look at net income. Maxim's net income over the last five years has been all over the place:

2011

2010

2009

2008

2007

Normalized Net Income\$389 million\$384 million\$170 million\$204 million\$334 million

Source: S&P Capital IQ.

Next we add back in a few non-cash expenses, like the depreciation of assets, and adjust net income for changes in inventory, accounts receivable, and accounts payable -- changes in cash levels that reflect a company either paying its bills or being paid by customers. This yields a figure called "cash from operating activities" -- the amount of cash a company generates from doing everyday business.

From there we subtract capital expenditures, or the amount a company spends acquiring or fixing physical assets. This yields one version of a figure called "free cash flow," or the true amount of cash a company has left over for its investors after doing business:

2011

2010

2009

2008

2007

Free Cash Flow\$678 million\$513 million\$263 million\$358 million\$215 million

Source: S&P Capital IQ.

Now we know how much cash Maxim is really pulling in each year. Next question: What is it doing with that cash?

There are two ways a company can use free cash flow to directly reward shareholders: dividends and share repurchases. Cash not returned to shareholders can be stashed in the bank, invested in other companies and assets, or used to pay off debt.

Here's how much Maxim has returned to shareholders in recent years:

2011

2010

2009

2008

2007

Dividends\$253 million\$246 million\$244 million\$247 million\$220 million
Share Repurchases\$267 million\$252 million\$53 million\$251 million\$6 million
Total Returned to Shareholders\$520 million\$498 million\$297 million\$497 million\$226 million

Source: S&P Capital IQ.

As you can see, the company has repurchased a decent amount of its own stock. That's caused shares outstanding to fall:

2011

2010

2009

2008

2007

Shares Outstanding (millions)295300305319321

Source: S&P Capital IQ.

Now, companies tend to be fairly poor at repurchasing their own shares, buying feverishly when shares are expensive and backing away when they're cheap. Does Maxim fall into this trap? Let's take a look:

Source: S&P Capital IQ.

Pretty good! Maxim's largest buyback over the last five years came almost exactly when shares were at the low point. That's nearly unheard of these days. Given reasonable valuations, these buybacks have likely been a decent deal for shareholders.

Finally, I like to look at how dividends have added to total shareholder returns:

Source: S&P Capital IQ.

Shares have returned -6% over the last five years, which increases to 15% with dividends reinvested -- a nice boost to top off otherwise low performance.

To gauge how well a company is doing, keep an eye on the cash. How much a company earns is not as important as how much cash is actually coming in the door, and how much cash is coming in the door isn't as important as what management actually does with that cash. Remember, you, the shareholder, own the company. Are you happy with the way management has used Maxim's cash? Sound off in the comment section below.

At the time this article was published Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.