<I did visit your page and began to read your paper. Didn't have time to go through the entire thing but I will go back. As far as my comment regarding P/E, ARSW has a very conservative accounting approach with respect to revenue recognition, not capitalizing R&D, etc. Although its cash flow numbers are not at my fingertips, earnings are a decent proxy for cash flow in this case.>
Case in point, Arbor as a software company should capitalize earnings if they want accounting earnings to approximate economic cash flow. R&D is, in reality, an investment. Accountants treat it as an expense, thus distorting the effect and the timing of the returns on the cash outflow that is R&D. For example, Arbor spends $2 million dollars on Financial stuff 3.0 R&D. The effects of this investment is expected to have a return that extends past the year of the actual investment. historically, thier product can be assumed (for illustrative purposes only) to have a product life cycle of 4 years and time to market of 1 year after R&D has begun. The 2 million dollar charge should be capitalized over the expected horizon of the investment, 4 years or 500,000 dollars per year. If the return on the investment does produce a postive number year in any year during the horizon in question (501,000 or more, not adjusted for risk or the cost of capital), then the company has invested at a loss in terms of R&D.
This is a much more realistic application of software R&D charges then GAAP currently allows. In many cases, cash flow statements must be adjusted for reality as well. For instance, companies who take a conservative stance in revenue recognition also happen to build up large stores of deferred revenue which actually serves as quasi-equity captial for investors. These accounts, and especially periodic change in these accounts should be reflected in profit and loss statements and in cash flow statements. They are not. The same can be siad about LIFO reserves, revaluation reserves, deferred tax reserves, etc. etc.
Believe me, if the accounting earnings model gave a adequate approximation of market value, then your local accountant would make much more wealth in managing money rather than doing taxes:-)
<BTW, Goldman is out with its opinion.>
Goldman is coming out with thier own IPO soon. Don't expect much of anything less than postive rays and sunshine for them until after it happens. If you get the chance, go by the site and look at the correlation analysis of between analysists consensus estimates and market value. It is downright abysmal in many cases. You might also wnat to take a look at Quote.com's IPO sight where they actually list the performance of the underwriters IPO's. Again, in many cases quite disappointing. Goldman represents the sell side of the industry. They are packed with extremely bright people, but the relationship between retail broker and client is rife with conflicts of interest. That is why you get those research reports for free. Who do you think pays for all of that work? |
