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Strategies & Market Trends : Professional Equity Analysis - the Pursuit of True Value
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To: Brandon Scott who wrote (80)2/27/1997 8:41:00 AM
From: Reginald Middleton   of 102
 
I don;t plan to do mac, but if I am not mistaken the newer versions of the Mac Excel can convert Windows .xls files (that is what i was told).

Earnings are not representitive of true value. Semi's often have a large investment in hard machinery (fabs) in which they heavily depreciate. Depreciation decreases earnings but does not effect cash at all. It is the accrual method of accounting for costs over a period of time. therefore if I purchased a 500 million dollar fab, and depreciated it over ten years, then I would be taking an annual 50 million dollar hit to my earnings that would not show up in excess cash flows. If the cash was not actively invested it will be retained and show up on my balance sheet as an asset for the next year. This (OVERSIMPLIFICATION) is just one example f how misleading accounting earnings can be.

Now if another semi purchased the same fab for the same price and amortized it over 40 years instead of 10, assumming operating profits were the same, they would produce greater accounting earnigings but similar cash flows, thereby having different P/E's for the same performance and prospects.

DON'T USE EARNINGS TO GUAGE VALUE
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