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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: EL KABONG!!! who wrote (20559)	6/30/2002 1:18:54 AM
From: marek_wojna	Read Replies (1) \| Respond to of 74559

Hi, KJC I ranked them too as one of the cleaner plays. Like I said, I won't take the chance to find out if the house is infested. <<http://www.globeinvestor.com/servlet/WireFeedRedirect?cf=GlobeInvestor/config&vg=BigAdVariableGenerator&date=20020619&archive=gam&slug=RVOXX <<News from The Globe and Mail Investors, beware cash flow wizardry -------------------------------------------------------------------------------- Advertisement -------------------------------------------------------------------------------- Fabrice Taylor 00:00 EDT Wednesday, June 19, 2002 Conventional wisdom has it that it's easy to manipulate accounting earnings but difficult to manipulate cash flow -- unless you're inclined to flirt with a jail sentence. There's some truth to that, but never underestimate the creative potential of company management to flatter cash flows. One of the most convenient ways of doing so is to stop paying your suppliers. Consider Bombardier. Investors care a lot more about cash flow today than they did a couple of years ago, and Bombardier, like any responsive company, wants to appease them. For the first nine months of fiscal 2002, Bombardier reported negative cash flow from operations of $2-billion. Then, in the fourth quarter, a reversal: operations produce positive cash flow, $1.3-billion worth. The company accomplished this feat, in part, by taking a little longer to, ah, open its invoices. The operating section of a cash flow statement shows cash used and produced by the day-to-day operations of the business and, below that, cash used or produced by changes to working capital: receivables, payables etc. Bombardier squeezed its working capital in the fourth quarter to produce $700-million in cash. The balance sheet reveals that payables and other accrued liabilities account rose by $744-million between Oct. 31 and Jan. 31. Shareholders breathed a sigh of relief; suppliers gnashed their teeth. There's nothing wrong with managing cash, of course, especially when it's a scarcity in your shop, but although these are classified as "cash flows from operations," they're not recurring funds. There are other ways to improve the cash flow picture. Capitalizing expenses is another favourite. When costs are treated as investments rather than expenses, the cash flow appears under the "cash from investments" rather than the operations banner, boosting the latter. The investment is then amortized over time. Since it's a non-cash operating expense, it's added back to income to calculate cash from operations. A cash flow enhancement that investors are bound to see more of arises from the treatment of discontinued operations. In its 2000 annual report, Nortel reported cash from operations of $40-million (U.S.). The next year, however, the annual report referred to 2000 cash flow of $824-million. No, the patient didn't find $780-million under his gurney. In the interim between reports, Nortel decided to amputate certain operations. The decision allowed Nortel to reclassify the cash flow from the discontinued operations -- $1.1 billion in total -- on a separate line at the bottom of the 2001 statement. Presto! Cash flows are in the pink. The rise of cash flow in the popular investment literature has a lot to do with the perceived inadequacy of accounting rules to measure economic activity. There's no question that corrupt executives have exploited the weaknesses in generally accepted accounting principles, and that GAAP setters have been slow to fix them. But earnings, according to most studies, are better at expressing firm value than are cash flows. Professor Michel Magnan of Concordia University has undertaken international comparisons and concludes that accounting earnings are a better measure than cash flow with respect to capturing performance. That doesn't mean investors shouldn't consider cash flows to gauge the quality of earnings. But understand that they can be as misleading to the innocent eye as earnings. vox@globeandmail.ca