SI
SI
discoversearch

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Technology Stocks : How high will Microsoft fly?
MSFT 492.01+1.3%Nov 28 9:30 AM EST
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
To: Joan Osland Graffius who wrote (3326)9/26/1997 6:35:00 PM
From: Reginald Middleton   of 74651
 
For the long term investors on the thread - I feel many of you are too focused on earnings. I always say cash flow is what counts in software companies.

For instance, assuming all other things are the same, which software company is more valuable, company A which reported $50 of earnings off of $200 of revenue, or company B which reported $20 of earnings off of 5the same $200 of revenue, but took the balance and invested it in upfront marketing and R&D? Before you answer, take the following in consideration:

1.) Most public software companies don''t pay dividends, therefore the investor does not receive a cash benefit for earnings before dividends.

2.) Company A that allotted for higher earnings growth has to pay approximately 60% more in taxes than Company B on the same gross cash flows. This gives company B more value than Company A as long as Company B''s investment (in R&D and marketing) results are above a nominal return.

3.) Company B makes strategic investments with the cash that was given to the tax man by Company A. If the investments are above the initial cost of capital, then Company B is SIGNIFICANTLY more valuable than Company A, for Company A gave nearly half of thier earnings away, while Company B actually made an economic profit on the portion of the cash that would have been conisdered tax fodder.

This is why one must use discounted cash flows and actual economic profit to measure the value of companies. It is also why companies don''t always move lockstep tandem with the quality of earnings announcements. For more on this, see the white papers and models located at the link below.

RCM rcmfinancial.com
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  

HomeMailHotSubjectMarksPeopleMarksKeepersSettings
Terms Of UseContact UsCopyright/IP PolicyPrivacy PolicyAbout UsFAQAdvertise on SI
© 2025 Knight Sac Media.  Data provided by Twelve Data, Alpha Vantage, and CityFALCON News