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Strategies & Market Trends : Joe Copia's daytrades/investments and thoughts -- Ignore unavailable to you. Want to Upgrade?

To: Joe Copia who wrote (24188)	2/21/2002 10:25:12 AM
From: Joe Copia	Read Replies (4) \| Respond to of 25711

Cash Flow - continuing your education. from OTCFILINGS.com When reviewing an SEC filing potential investors and current investors want to take a look at revenues, earnings and cash flow. These three items are extremely important and companies are very quick to announce revenues in press releases. Investors should take a closer look at the numbers though. Cash flow does not necessarily mean a company is doing well. There can be several sources for cash flow. The most common for a profitable, solid company is of course cash flow from operations. Cash flow from operations simply means the company is receiving payment from customers for whatever service or business they provide. This is of course the normal way of generating cash flow in most profitable businesses. There is also cash flow from financing activities. Cash flow from financing activities should always be looked at a bit closer. Cash flow from financing activities basically involves the company selling shares, normally at a great discount over current market prices but not always, and using the proceeds to finance their business and pay the bills. Selling company shares to finance ongoing operations and pay day-to-day bills is not a good sign in most cases. Most start-up and development stage companies must fund operations this way because of lack of revenues, because their product or service is not marketable yet. Development stage companies have an idea and need the funds to survive until their idea gains acceptance in the market and revenues can be generated. Unfortunately some development stage companies manage to stay in this stage for several years, never earning a profit and never developing their product or service. So they survive year after year by issuing more and more stock. As the stock enters the market place, creating shareholder dilution, the share price tends to decrease. With this decrease the company must sell more shares to receive the same amount of cash, therefore entering a downward spiral of the share price and if a product or service is still not on the horizon then the reverse split is an option to get the share price up, shrink the float and start the financing cycle all over again. You probably guessed right that the shareholder ends up losing. Normally a company that continually finances ongoing operations by issuing stock will have very little to no revenue and earnings. Some times companies can show great earnings per share for a given quarter by the selling of a subsidiary, part of the company or by cash earned from investments. There will usually be a press release informing current and potential shareholders that the company achieved great earnings per share for the quarter but investors should look at the filings or investigate with the company how these earnings were achieved. They may be great earnings for just one quarter with no possibility of repeating the profitable quarter. The SEC filings are a great tool to begin the due diligence process but a closer look will allow the investor to understand where the cash flow or earnings come from and allow the investor to judge future potential. As stated earlier, legitimate companies have to at times fund operations from issuance of stock, but the length of time that a company does this can speak volumes about future prospects.