Ian, I must disagree with the implication of these observations:
2. Net Income vs Operating Income. I understand and accept the GAAP behind your statement. However, for a company such as Dell which consistently has a "huge" free cash flow, interest income is not an anomaly or a one time event. One might even regard their use of cash as another line of business which also can be expected to consistently add to earnings per share.
...even if other operating earnings were to drop to zero.
Dell has the option to use the money to earn interest income; to do buy backs; or to purchase income producing assets.
The issue I raised has nothing to do with GAAP accounting. It is one of figuring where the economic profit of the company is derived from. Yes, Dell has huge free cash flow, and this is one of its primary attractions as an investment vehicle because it allows for very rapid and sustained growth. But Dell's cash flow from financing is rather small, and in any case, was not the point behind my post. I was simply pointing out that the bulk of the increase in earnings came from non-operating sources, and that isn't good over the long run.
Generating significant income from cash and short-term investments is not the way to run a business, because individual investors could do it better themselves. The investor does not incur overhead, nor is he subject to double taxation on that source of income. Using cash to repurchase stock is really a tax-advantaged dividend, and does nothing to increase the capitalized value of the company (although it does boost share value and eps growth).
What we as investors should look for is the deployment of cash into income generating assets that exceed the average weighted cost of capital for the company. That's how share price is maximized. There is nothing wrong with maintaining large cash balances provided that the cash will be deployed productively. If not, it ought to be returned to the shareholders through dividends or share buybacks.
TTFN,
CTC
|
