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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: j g cordes who wrote (15213)	8/15/2002 7:35:57 PM
From: TimbaBear	Read Replies (1) \| Respond to of 78742

Cash Flow Analysis---Intel Page 1. Before I start with the numbers crunching on Intel, I want to review with everyone my approach to some of the items contained on the Statement of Cash Flows. First, so we are all on the same page let’s go over the reason for and the basic format of this required financial statement. The Statement of Cash Flows (which from here on I’ll refer to as SCF) is the financial document that reconciles the Income Statement with how the cash moved through the company for the period involved. The Income statement isn’t good for understanding cash flow because there are many “accrual” type accounting entries and non-cash events (like depreciation, reserve accounts, amortization, etc) which make following the cash flow virtually impossible to do. The purpose of the SCF is to remove (back-out) those non-cash items so a clearer understanding of the cash flow from operations can be seen. This function is accomplished in the first (of three) sections of the SCF. The broad heading of this first section often makes it pretty clear what it’s mission is. For example, on INTC’s SCF the heading is: “Adjustments to reconcile net income provided by (used for) operating activities.” Pretty straightforward to here! Some writer’s I’ve read have suggested going into assessing the amounts of each and every entry in this first section and, I suppose, there might be some merit to doing so. However, for me, for what I have gained versus the time it took, I didn’t find that my understanding of the value of the company was significantly better off, so I only usually go into the Depreciation number a bit (explained later) and only those other areas if something contained elsewhere in the filing draws my attention. In the case of INTC, something did draw my attention to the “Amortization of Goodwill” entry and I’ll refer to this again later as well. So, moving along, the first line of the SCF is the bottom line from the Income Statement (Net Income) and the first section reconciles the accounting net income with the net cash picture. Most analysts that I’m aware of only go into the SCF far enough to get two numbers: The bottom line number from section one, Cash From Operations (CFO); and the CAPEX number which is one of the line items in the second section. They perform a simple calculation with those numbers and believe they have the bulk of the information they need from the SCF. That calculation is: CFO – CAPEX = FCF (Free Cash Flow). I have shown with my previous analysis of DELL that more than this simple calculation is needed to get the clear picture of true cash flow. It will be demonstrated again with the INTC analysis. But before I get too far ahead of myself, I want to finish the outline of the SCF. So we have three sections: the first which leads to CFO; the second: “Cash flows provided by (used for) investing activities; and the final section: “Cash flows provided by (used for) financing activities. The totals of each of these three sections are added together to give a final number: “Net Increase (decrease) in cash and cash equivalents”. It is this number that I usually start with for my cash flow analysis. I then work my way back up through the financing and investing sections backing out the non-operational items to get the true cash flow of the business. This may sound like a daunting task, but it is really not that difficult once I got past the “newness” of it. A sane person at this point might ask: “Why?” “Why would you (or I) want to go through all this effort?” Assuming some that are reading this have some sanity left (although….to be reading this…..), the answer is: "So I can get to an earnings amount that I can believe in!" It is the number I derive here from the statement of cash flows that I plug into any metric or ratio using “earnings” EPS has been shown for many years to be easily manipulated, professional analysts appear to be “on the take” so to speak, Stock-brokers appear to only have annuities for sale. In the final analysis, we have ourselves and the product of our efforts in which we can rely. My cash flow analysis is only that. It is not a recommendation for or against any investment. It is not a suggestion of what to do with the analysis. I will share some ideas of how I use it, but one of the things I like about this thread is the ability to work with the information in different ways that has been displayed here over the years. Regardless of how it may seem, I have no position in INTC (long or short), nor do I have any positions in the options of their stock. Starting with the next post, I will outline my findings regarding INTC. Timba