American Eco (ECGOF, ECX on Toronto exchange) Message Board

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Gold/Mining/Energy : American Eco (ECGOF, ECX on Toronto exchange)

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To: Roger Cossaboom who wrote (2362)	4/11/1998 8:43:00 PM
From: Duncan	Read Replies (1) of 2841

<<ECO mgt. could reduce investment cash flow and/or financing cash flow to reach the point where positive operating c.f. exceeds the "drain" of neg. inv. c.f. plus fin. c.f.(no new). But would you be happy with a resulting 3%(say) or -5%(say) eps growth to go w/positive operating cash flow?????>> Your making a huge assumption--that a company can automatically reduce its investing/financing cash flow needs if it decides to stop growing through acquisition. This simply isn't true...assuming I understand your post correctly. ECO could have reduced its overall need for financing cash flow...if the companies it acquired and it's own subsidiaries were organically turning positive cash flow from OPERATIONS. But no matter how much ECO reduced its use of cash from financing and investing activities, OPERATING cash flow would still have been negative...so ECO couldn't have turned a positive cash flow from operations...UNLESS it acquired companies in 1997 that were turning positive cash flow...and UNLESS ECO's previously acquired subsidiaries were turning positive cash flow from OPERATIONS. Now, would I be happy with 3% EPS growth if the company turned postive operating cash flow? Of course not. But let me point out that a simple reduction in financing cash flow doesn't predicate a reduction in EPS growth...and certainly doesn't mean ECO will generate positive operating cash flow. Your attempting to correlate one form of cash flow to another...when they are truly quite different...which is why the accountants separate them on the Statement of Cash Flows. In general, growth through acquisition can require substantial financing activities (unless its a stock swap)...but the goal to significant EPS growth and the way to reduce cash for financing activities is to acquire companies that are already turning positive cash flow...or make very quick changes to a company so that it does generate positive cash flow. In my opinion, ECO grew very quickly in 1997...and probably took their eye off the ball. While some of their subs generated positive cash flow from operations...many didn't (just speculation)...and when they started to spend their time on one acquisition after another...they forget to fully integrate the prior acquisitions in an efficient manner and they forget to look at their current subs to make sure they were operating efficiently. Just look at the 150% increase in A/R from 1996 to 1997...yet revenues increased by 1/2 that amount--84%. That means one of three things--they were not monitoring and aggressively collecting A/R...they are offering extensions or extremely favorable payment terms...or their is simply a timing difference due to the non-cyclical nature of their business. I have no idea which one it is...but it's certainly something to watch...particularly because their business isn't running as efficiently as it should--negative cash flows. In summary, growth through acquisition is an excellent strategy...and a quick way to boost shareholder returns...as long as the parent company has the people resources to effectively and quickly turn target companies around and to generate positive cash flow...AND if management dedicates sufficient time and resources to ensuring that its current operations are running with positive cash flow. ECO did all of the above until 1997. Hopefully they can get the acquisition program running smoothly again. My two cents. Duncan

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