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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Greg Jung who wrote (176381)	7/1/2002 9:30:33 AM
From: reaper	Read Replies (3) \| Respond to of 436258

<<and say GFY for claiming that cash flow is simple to see drainage>> normally i would just say go "FY" and leave it at that. but given the depth of your mis-understanding of the WCOM financial statements i will instead suggest you go get some remedial accounting and securities analysis education. yes, "cash flow from operations" was $2 billion a quarter. but, cash flow from operations is not the be all and end all of the cash flow statement; it is only relevant in the CONTEXT of how much CAPITAL is necessary to generate that cash flow. for example, companies like Delphi and Coca Cola Enterprises produce tons of "cash flow from operations", but the businesses produce very little (if any) shareholder value IMO as all of that cash flow has to be re-invested into the business for capex. so there is no FREE cash flow, which is the RESIDUAL cash that is the basis for EQUITY valuation. on the other hand, you have businesses like say Paychex or the radio companies where almost all of the "cash flow from operations" is available as FREE cash to equity holders because the capex re-investement needs of the business are very low. which brings us to Worldcom. in 1999 they had $11.0 billion in cash from operations. they turned around and spent $9.6mm of that on capex and acquisitions, leaving free cash that year of about $1.4 billion. the next year, 2000, they had cash from operations of $7.7 billion, and they spent $14.4 billion on capex and acquistions. then came 2001, with $8.0 billion of cash from operations and $9.7 billion in capex. so over the course of THREE years, Worldcom (i) had total NEGATIVE free cash flow of $7 billion; i.e. they did not generate ANY cash that was available to equity holders; and (ii) while they were in the process of spending all of this money the cash flow from OPERATIONS was SHRINKING (i.e. they were spending all their money on capex and not only was their business not growing, it was shrinking). given this fact set, there are basically 3 conclusions that you can come to. (i) one, that Worldcom management is a bunch of irresponsible morons and they are simply throwing money away at capex when the operating cash flows of their business are declining; (ii) two, that Worldcom's business needs basically ALL of the available cash flow from operations to reinvest in capex to keep the business afloat (like Delphi or Coca Cola Enterprises); or (iii) three, that Worldcom is under-stating its operating expenses (and thus over-stating cash from operations) and over-stating its capex (and its not like they'd be the first company to do this; you are hardly "reaching" to come to the possibility of conclusion #3, as we have just in the last few days seen Elan, Xerox, Global Crossing, Quest, and others do exactly the same thing). Given ANY of the scenarios #1, #2, or #3 above I don't see how you own the stock, or frankly how you even own the bonds. Did I KNOW they were cheating. No. But the alternatives to them being liars were that they were morons or that their business inherently generated no cash. So no matter what the equity wasn't worth a damn friggin' thing. By the way, you are aware that the accounting employed by Mr. Sullivan was actually the CORRECT method only 6 years ago, before deregulation, are you not? The accounting doesn't matter. That people are only focussed on EBITDA and operating cash flows instead of understanding those numbers in the context of a full financial statement and return on invested capital is what matters. End of lesson, end of rant, and sorry everyone else i promise this is the last i have to say on this matter. Cheers