1st marathon, the same broker who uhderwrote the all the convertible share/warrant deals, is now trying to boost the stock. guess why?
BTW : if you haven't read the cashflow article here it is:
Fundamental Questions: Getting a Grip on
Cash Flow
By Andrew Greta
Special to TheStreet.com
9/27/98 12:16 AM ET
Ever since our series on fundamental analysis and follow-up
Q&As, TSC readers have been clamoring for information on
reading cash flows -- the final statement in the fundamentalist's
basic triad of financial reports.
Here you go, and once again, let me know what you think. Please
keep those questions and comments coming (with your full
name!).
If the balance sheet represents the skeleton of a corporation,
cash flow is the lifeblood. No matter how strong the muscle and
bone of a firm, a company with a severely compromised
circulatory system is bound to wither and die in short order. So
what exactly is this concept of cash flow, how do we measure it,
and what does it mean to investors?
First, keep in mind that the net income we discussed in previous
pieces is not cash. Because of those accounting vagaries known
as the "accrual rules," a firm records income at the time of a sale
but only counts the cash when the payment check clears -- no
matter how much later.
To see how this shakes out on the financials, let's take an
extreme case. Say a firm called Snipe Hunt sells a million dollar's
worth of left-handed smoke-benders in 1998, billed for payment
sometime next year. Since the product was officially sold but no
actual money changed hands, the firm can record income of an
even million on the '98 financials although it hasn't seen a red
cent in hard currency yet.
Where did the money go? It landed (at least on paper) squarely in
the accounts receivable section on the asset side of the balance
sheet -- in other words, as something owed to the firm like an
outstanding loan. Some claim that this is all just accounting
hocus-pocus and use the situation to bolster the argument that
cash flows are a better basis than income for financial analysis.
And they may be right.
After all, at year-end Snipe Hunt looks profitable if you just look at
net income. So there sits the CEO, chomping a cigar, counting his
expected bonus with a sly grin. Then the utility bill lands on his
desk. Suddenly he realizes that the corporate coffers are as bare
as Old Mother Hubbard's cupboard, and he starts frantically taking
up a collection at the water cooler just to keep the lights on.
Unlike Blanche Dubois, businesses can't operate long on the
kindness of strangers. In other words, accounting profits recorded
in pencil on some ledger don't pay the bills. Cash does.
So how do you get a read on the health of a firm from a cash
standpoint? Break out the fundamentalist's sphygmomanometer
and download a copy of the cash flow statement from a service
like edgar-online.com or freeedgar.com (it's filed under the 10-K
heading just like the balance sheet and income statement). For
my examples, I'll be falling back on my old standby,
Anheuser-Busch (BUD:NYSE).
Cash-Flow Statement Layout
The first thing you'll notice is that the statement is broken down
into three sections to detail which functions of the firm are
generating cash (a positive number) and which are spending it (a
negative figure). The three sections are as follows:
Operations
The main source of a company's cash stems from the core
business of a firm. In BUD's case, it's selling beer.
Investing
Any cash transactions involving land, buildings, equipment,
investment securities and business acquisitions. It also includes
any necessary maintenance costs associated with keeping the
firm's physical assets operating, as covered under the generic
term "capital expenditures." For BUD, this includes maintaining
and replacing those big stainless steel brewing vats to keep them
pumping out those 96 million barrels of beer a year -- enough
six-packs to go from here to the moon and back, I might note (God
bless America).
Financing
Transactions between the firm and its creditors and
shareholders. These items can include things like taking out a
long-term loan, retiring debt or paying dividends to shareholders.
Finally, the bottom line of the report will give the total amount of
cash on hand at the end of the year and should correspond
exactly to the figure on the balance sheet. If you look at some of
the detail in each section, you might get the idea that cash flow is
just calculated off of net income by making some simple
adjustments for noncash items, and you'd be exactly right.
Going back to our Snipe Hunt example, net income for the firm
would indeed be $1 million, but none of that came in as cash
during the year. Once we subtract the increase of $1 million
accounts receivable, it becomes clear that cash flow was zero for
the period (in BUD's case, these adjustments are included under
the heading "Increase / (Decrease) in noncash working capital").
Life Cycle of the Firm
You can tell a lot about where a firm is in its life cycle by looking at
the relative proportions of the cash flow from each of these main
sections.
New firms in their infancy usually have negative cash flow from
operations as they build inventory and invest heavily in new plants
and equipment. Their main source of funds is through financing
activities, and this section usually shows big cash inflows (large
positive numbers).
Firms in the growth stage often have positive cash flow from
operations, but not enough to fully finance their continued
investments, which still show up as negative figures. As a result,
the difference is made up with moderate inflows from financing
activities.
Mature firms show large operating cash inflows along with
moderate and stable outflows in the investment section, as the
firm simply maintains its existing equipment. For the first time,
financing cash flow turns negative as the firm pays off debt and
distributes the remainder to shareholders as dividends.
In a decline phase, operating cash flows can still be positive as
the firm reduces accounts receivables and inventories. One
telltale sign, however, of a contracting business is that the
investment cash will likely go positive as the firm sells off hard
assets.
Although none of these are hard-and-fast rules, the general ideas
can be helpful as summarized here:
Business Stage
Cash Flows
Introduction
Growth
Maturity
Decline
Operations
-
+
++
+
Investment
--
-
-
+
Financing
++
+
-
-
Looking at BUD, the company seems to be squarely in the
"mature" phase with big operational cash flows coupled with solid
dividend payments.
Free Cash Flow
I've seen several different yet similar formulas to calculate the
increasingly media-hyped concept of free cash flow. The simple
way is to just take the total cash flow from operating activities and
subtract capital expenditures from the investing section. For BUD,
the equation looks like this:
FCF = Operating Cash Flow - Capital Expenditures =
1,816.6 - 1,199.3 = $617 million
Obviously, the more free cash flow the firm has, the better. But
how much is enough? To go any further, we need to look at some
relative measures to get some basis for comparison.
Ratios
Often, after-tax operating cash flow is just subbed in for net
income for calculating some basic ratios. The feeling is that cash
is a more solid measure than the wispy notion of income.
Cash Flow Per Share
Similar to the EPS figure, this ratio gives you a view of how much
money the firm is making for the shareholders. For BUD, it looks
like this:
(Operating Income - Taxes) / Shares Outstanding =
(1,816.6 - 703.6) / 487 = $2.29
Cash Flow to Current Liabilities
Some argue that this ratio is a much better indicator of liquidity
than the current ratio as described in Dissecting a Balance Sheet.
In BUD's case:
Cash Flow from Operations / Average Current Liabilities
for Period
Or:
1,816.6 / (« * (1,500.7 [97 Curr Liabilities] + 1,430.9 [96
Curr Liabilities])) = 124%
Pundits claim that anything more than 40% is a healthy number,
so BUD passes with flying colors.
Summary
The statement of cash flows gives you a read on the circulation of
the vital lifeblood of a company. Overall, the statement can give
you an idea of which stage of the corporate life cycle a firm is
operating in. Other ratios use operating cash flow as a substitute
for income to generate (arguably) more accurate indicators of a
company's performance and liquidity levels.
I encourage you to try out the tools provided in the entire series on
fundamental analysis on your own picks. If you get stuck, we're
here to help. Keep those questions rolling in and we'll answer
them in future columns.
TLC even fails here. |
