Hi Pirah,
Welcome back. We have had some interesting discussions about quality (and lack of quality) of reported free cash flow numbers, but mostly on other threads. With people being largely uninterested in the quality of reported earnings numbers, I guess it should be no surprise that many people are even less interested in the quality of cash flow from operations numbers and free cash flow numbers. And UF continues to be correct that theoretical models attempting to determine intrinsic business values have very little bearing on business value as reflected in stock prices.
Nevertheless, there are a number of people that feel, in cases where companies are heavier issuers of stock options to employees, that their free cash flow numbers are generally inflated by this "finance activity", and that such a free cash flow number is not the same quality as free cash flow that is truly generated from operations. I am in 100% agreement with that line of thinking and feel that when the FASB finally requires companies to include stock option expenses in earnings, that this non cash charge should be added back in to the cash flow statement as cash flow from financing activities rather than added back in to cash flow statement as cash flow from operations. But I won't be holding my breath for companies to do this; they will still be looking for any way possible to report results to investors in a manner that overstates business performance, and if this means highlighting cash flow from operations numbers and free cash flow numbers that are inflated by finance activities, they will be sure to do it.
Interestingly enough, however, once companies begin deducting equity compensation from earnings, the impact on the balance sheet will be as if financing activities did indeed occur, regardless of how companies treat the activities on the cash flow statement. In the shareholders equity section of the balance sheet, for example, paid in capital will increase by the amount of the stock option expense and retained earnings will now only increase by net income that has had the expense of equity compensation deducted from it--imo. (I am ignoring tax consequences for the moment) .
There are some folks on the Cisco thread that have some interest in this topic, so feel free to reply over there if you also have any interest in the topic. I have a lot of links regarding this subject. Here is an old (somewhat convoluted) post of mine on the Cisco thread that you could reply to over there if you are interested in continuing the discussion: #reply-18608585
Good to hear from you and all imo.
Best Regards,
Huey |
