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Strategies & Market Trends : Value Investing
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To: Brendan W who wrote (13728)1/23/2002 2:22:25 AM
From: Don Earl  Read Replies (1) of 78482
 
<<<Since most going concerns consume cash, their earnings streams may be of limited value unless such flows are also combined with access to capital markets, either credit markets or equity markets or both.>>>

Good post. The only problem is a company that constantly needs to issue debt or stock to stay in business is not a going concern. The Enrons and K-Marts are a dime a dozen. Everyone is hap, hap, happy with the wonderful revenue and PE right up until it's time to pay the bills. If a company is free cash flow negative while reporting great earnings, it means they are depreciating their costs at a much slower rate than those costs are incurred. Any company with a debt to equity ratio over .5 to 1, and a low PE, is a time bomb waiting to explode.

That doesn't mean those stocks won't go up. On any given day there are enough of them trading at levels high enough to make YHOO at $250 look like a bargain. If the SEC were to make one rule to cure Enron type reporting, it would be to require companies to report free flow cash from operations at the bottom line. At least it would give investors an easy way to see if a company is making money or just reporting earnings. When a company has to leverage shareholder equity to obtain operating cash, there is no shareholder value. The creditors own the company.
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