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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: FESHBACH_DISCIPLE who wrote (47923)	2/5/2001 12:36:44 PM
From: Stock Farmer	Read Replies (2) \| Respond to of 77400

Thread: The way I read it, the "inventory" debate between FD and Gary did not have a satisfactory resolution. Here's the link to start - Message 14744120 Looks to me like both are "right" - just not about what the other is saying. What you are saying FD is that Cost of Goods Sold includes an adjustment based on changes to inventory levels in the period. Inventory represents money spent but not on stuff sold. If inventory goes down, then the stuff that came out of inventory went in some time earlier. The costs in that period are added into expenditures this period to get a true COGS. Conversely, if inventory goes up, then clearly some expenditures this period weren't on "Goods Sold", they were on "Goods not yet sold" and need to be subtracted out to get a true COGS. Inventory going UP decreases COGS and vice versa. This makes sense. You would also be correct to point out that companies can legally trade off cash flow for earnings (and vice versa) this way - up until the day the books close. 73 M$ change in inventory would be worth a penny of earnings and vice versa. Perfectly legal, no funny business. Impossible to prove or disprove if the Executive team are worth what they are paid, or unless it gets out of hand. On the other hand, seems to me that Gary is making a good point. From an outside view, if inventory as a percent of revenue is maintained... then perhaps the business is growing fat at the same rate as it grows muscle. There are mixed opinions about this as an appropriate response, but there is nothing wrong if it is indeed the case. Gary would be perfectly correct in the short term. QonQ, inventory grew by 64% while revenues increased by 66%. In the longer term, it's slightly different. I went back into the annual reports for the last three years. In '98, inventory represented 4% of CSCO's revenue. In '99 it was 5% and in '00 it was 7%. Which hints at CSCO becoming more well marbled as it ages. The jury is out. So, FD might be right that CSCO is shovelling gravel from the inventory hole into the earnings hole. Or Gary might be right and CSCO is merely just growing. As with many of these debates, the real answer will be clear in hindsight. More to anticipate as we look for the earnings report. John.