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Microcap & Penny Stocks : Financial Shenanigans: Stocks Looking for a Fall
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To: HeyRainier who wrote (61)5/26/1998 3:16:00 AM
From: Q.  Read Replies (1) of 108
 
Rainier, the problem with comparing CFFO to net earnings is that the sort of stocks many SI readers invest in are the high-growth companies for which the test isn't valid.

Typically a growing company experiences a lot of expansion of accounts receivable and inventory, and this causes a company reporting positive earnings to have negative CFFO, not because of funny accounting, but just because of growth.

Schilit's text, which you quoted, actually says this, but I think it's worth emphasizing that unless you invest in slow-growth companies the test isn't useful.
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