Huey:
P: When you look at a statement of cash flows, in the top section which deals with operating cash flows, there are entries for changes in short term assets and liabilities. I'm asking you to think about whether they should be accepted or used as presented.
H: Pirah, I can't just let that teaser pass by without sending you at least one follow up question.<gg> The question is do you recommend using these numbers as presented or do you recommend making some adjustments?
To answer that question, you must ask yourself " should these numbers be used as presented, or should there be some adjustments?"
Joking aside, here are my thoughts on this issue. Changes in operating assets and liabilities are by nature very lumpy, and one quarter can give results that are very misleading - in either direction. I think that for the purpose of getting a snapshot for the basis of a valuation exercise, we are better served by using a 10K than a 10Q (or the past four quarters if we are more energetic).
The quarterly changes are necessary, however, if you choose to perform a "dual cash flow" analysis. This is not a valuation technique, but is a means for evaluating the near to mid-term direction of the company's business. In that respect, it can serve as a leading indicator for that business.
Back to your question - I think it is good to see just how much of the cash flow results from these balance sheet manueverings, but suggest using longer term, essentially "smoothed out" data for valuation exercises.
BTW, I liked the responses that both Ethan and yourself gave to my "split the company" idea.
- Pirah |
