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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 78.94

+1.3%

1:14 PM EST

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To: Stock Farmer who wrote (63034)	2/10/2003 1:50:58 AM
From: rkral	Read Replies (1) of 77400

John, re "So I err on the side of assuming management is being honest but not totally forthcoming with the truth. So I look for the unreported costs (which aren't required by law to be reported as costs) and factor them in ... " I agree. Let's factor them in for CSCO. As of 1Q2003: Retained earnings $7.53B Common stock & paid-in capital $20.88B Other $0.14B ----- Total stockholders' equity $28.55B Retained earnings percentage of the total seem low? Wait until we factor in the $5.67B after-tax non-cash expenses since July 1995, the expense reported in the SFAS 123 footnotes. Stockholders' equity would then be: Retained earnings $1.86B Common stock & paid-in capital $26.55B Other $0.14B ----- Total stockholders' equity $28.55B $5.67B moved from Retained Earnings to Paid-in Capital, but stockholders' equity is unchanged. But a similar comparison for FCF would show a huge impact, I suspect. After all, FCF from operating activities would be reduced by $5.67B. (I'm a FCF novice, so don't really know how to present this argument.) So the investor who values companies on a price-to-book basis sees no impact from expensing options. But the investor who uses FCF and DFCF to value companies would see a huge impact. And what about return-on-equity? Retained Earnings and Stockholders' equity reported FY1995 is $3.33B and $5.33B, respectively. Retained Earnings dropped from $3.33B to $1.86B over 7.25 years. Ouch! Looks like negative ROE to me. Net Income for one or more of those 7 years must be negative, after accounting for stock option expenses. Geez! My really small CSCO investment may be $0 as soon as the market opens. :-(( Ron

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