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Microcap & Penny Stocks : Financial Shenanigans: Stocks Looking for a Fall -- Ignore unavailable to you. Want to Upgrade?

To: ftth who wrote (60)	5/25/1998 1:48:00 AM
From: HeyRainier	Read Replies (2) \| Respond to of 108

Hi Dave, that's a nice article you gave us. Now, speaking of Quality of Earnings, I provide below a means of helping determine that, as outlined in Schilit's Financial Shenanigans: CFFO Measure Quality of Earnings "An excellent way of determining a company's "quality of earnings" is by comparing Cash Flows From Operations (CFFO) with reported net income (or, alternatively, using discretionary cash flow, which is CFFO minus projected capital additions, minus dividends, minus projected debt retirement). If a healthy net income figure can be validated by a similarly high CFFO, chances are that the net income was truly earned (in the course of business) rather than financially engineered. If, on the other hand, CFFO is negative for several periods while net income is positive, or if the net income is consistently higher than CFFO over a longer time frame, a company might have a poor quality of earnings. Strong companies typically report healthy profits (i.e. high net income) and generally have significant net inflows of cash from operations; conversely, weak companies typically report small profits or even losses and generally have small net inflows (and sometimes net outflows) of cash from operations. If a company reports healthy profits accompanied by net outflows of cash, though, investors and lenders should be suspicious. The CFFO/net income comparison is particularly pertinent for well-established companies, whose sales, receivables, and inventory generally don't fluctuate rapidly. Two such companies, retailer W.T. Grant and motel operator Prime Motor Inns, are profiled in this chapter. Conversely, the CFFO/net income comparison is less applicable to young, profitable, fast-growth companies that must incur substantial costs to fund their growth in receivables and inventory. For example, Cabletron Systems and Cisco Systems, two of the fastest-growing computer companies, had CFFO/net income ratios of significantly less than 1.0 for 1990 and 1991..." It then continues with a telling example of W.T. Grant, one of the country's largest retailers in the 1970's. This company, while having consistently strong bottom line earnings, abruptly filed for bankruptcy in 1975. Investors who calculated Grant's CFFO and compared it with its net income would have probably discovered the cash shortage as early as 1969 or 1970, several years before the market at large noted the problem. There is a chart that follows that includes Grant's steadily increasing net income, but right next to it was an ever-widening negative CFFO figure. Just another tool for your defense... Regards, Rainier

To: ftth who wrote (60)	6/2/1998 4:33:00 PM
From: BelowTheCrowd	Read Replies (1) \| Respond to of 108

> The study removed the financial companies that didn't have current assets or plant assets that contributed meaningfully to returns < The problem with this is the assumption that all non-financial companies necessarily do have current and plant assets that matter. In fact, much of the value being created these days is dependent on itellectual property which is often not capitalized when it's developed. In it's ultimate form, this process leads to companies which have almost no assets but still have tremendous quality of earnings which result from non-tangible copyrights, patents, etc. This is most common in software, but even in computer hardware it is increasingly common, as we move to outsourced manufacturing, low inventories, and rapid turns. So I'm not concerned that "non tangible" assets are up as a percentage of total assets at many companies. This is to be expected given our shift to an information economy. However, it is worth questioning whether 24% is the "right" number. I have no evidence either way on this. mg