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Subject: cflo/ELTE: (was:Re: AW: [CANSLIM] Arthur Andersen)
Date: Sun, 20 Jan 2002 10:13:01 -0600
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This is a multi-part message in MIME format. - ------=_NextPart_000_00BE_01C1A19B.0AB32540 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable To add to Andreas' note. This is a great tie-in to the ELTE discussion. = If ELTE is aggressive about capitalizing expenses related to software = development, their EPS will look good but their cash flow will be lower = and tell the "real" story of money left after they pay for everything = year to year. An example of aggressive revenue reporting where EPS looked good (high = Rev's) but the cashflow told the story--MSTR (March 2000). They = aggressively reported deals as "revenues" even though they had no money = in hand. In this case, cash flow was again lower than EPS numbers. The = other way you can tell something is up is a high receivables number. A = quick check on ELTE shows receivables are 40% of revenues. This doesn't = necessarily mean they're "up" to anything, but should raise a yellow = flag when reviewing the financials or making comparisons year to year. Katherine ----- Original Message -----=20 From: Andreas Himmelreich=20 To: 'canslim@lists.xmission.com'=20 Sent: Sunday, January 20, 2002 10:06 AM Subject: AW: AW: [CANSLIM] Arthur Andersen Jans, cash-flow can be below EPS, since in order to derive you must add non-cash expenses (e.g. appreciation of a mashinery park) minus non cash income (e.g. "Goodwill") minus cash expenses that are not calculated in the earnings (like the=20 famous "one time" charges) plus cash income that are not calculated in the earnings (like "one = time"=20 income) The thing is that companies can very often choose totally legal if a = cash=20 income or cash expense reflects into EPS. The same for non cash income --> They can activate "Goodwill" or they = can=20 book it as EPS reflecting charges. So it gets dangerous if the Price Cash Flow Ratio is below the PE = Ratio,=20 because then the firms potentially uses the legal possiblity of choosing how to = book=20 their cash expenses in a way so they are not reflected in the earnings (e.g. a cash expense of the = EPS=20 Book) extensivly. Accountants refer this then as a unhealthy ballance sheet or = "aggresive"=20 reporting (Amazon is King here, they post an operative break even, which is useless because they have a negative Cash flow of = a=20 Dollar). You will not belive what you can reach legally with this "choosing=20 posibilities". I worked as a controller of a Chamber of Comerce and Industry (which = has=20 slight different reporting laws, but still you could "choose" a lot). The people controlling us (the members) had no clue on what hit them, = no=20 idea of the money the chamber really made (in this case much more then we reported, because we wanted to give the = impression,=20 that we are poor, so they did not have the idea of paying less fees). If they had questions you=20 simply answered in such a complicated way, so they gave up ... You can legally cook you earnings books, so you appear poorer or = richer. I=20 did not like this, so I decided to get another job ... Poorer is not very likely in these days due to the Raiders in the = 1980s=20 which bought poor looking companies that where acutally rich and sold them. Since this times everybody tries to = look=20 at least as rich as they are. I found 579 Firms where the PE is below the PCF Ratio = http://moneycentral.msn.com/investor/invsub/finder/finderx.asp?Query=3DSV= 1 =20 QF140Z05F215Z&Name=3DSearch2&Tickers=3D25 NYCB is a good example: PE 21 PCF 62,5 So the PCF is a very good indicator on how much a firm uses the OFF = BOOK=20 cash expenses. CASH FLOW REPORTING CAN NOT BE COOCKED LEGALLY. Another good way is to look on the taxes they pay. If the earnings are = high=20 and they do not pay taxes, there is a problem (this counts not for Israel Companies, due to the fact that they give huge = tax=20 breaks to their firms, especially in the first years of business). See you Andreas > -----Ursprungliche Nachricht----- > Von: Spencer48@aol.com [SMTP:Spencer48@aol.com] > Gesendet am: Sunday, January 20, 2002 4:16 AM > An: canslim@lists.xmission.com > Betreff: Re: AW: [CANSLIM] Arthur Andersen > > Dave, Andreas and Tom: > > Andreas: How can cash-flow be below EPS, since in order to = derive > cash-flow you must add non-cash expenses (like amortization expense, > and-possibly (see next paragraph as to why I am uncertain)-good-will = expense) > > On Wednesday or Thursday's CNBC show with Lawerence Kudlow at = 11PM=20 EST, > the show revolved around the Enron scandal. I thought I heard = mention=20 that > the Supervisory Board relating to Accounting Practices was doing = away=20 with > the balance sheet entry "Goodwill", but I thought it had already = been=20 done > away with several years ago? > > In any event, what baffles me is that just about everyone on = the > business news remarks on Enron's OFF BOOK ACCOUNTS, but I've heard = no one=20 on > any of these shows lambast anyone at Enron (or Anderson > who-putatively-audited them) who decided to go with off-book = accounting.=20 It > makes one wonder, how many public corporation have off-book entries? = It=20 also > makes one wonder if DGO, WON and IBD recognize these entries as=20 legitimate-or > if they are even aware of them? I guess the bottom line is: How=20 accurate is > an off-book entry, and does it accurately and legally reflect the > corporation's profit/loss statement, or is it instead a gambit a=20 corporation > uses to circumvent investment law and SEC supervision? > > jans > > > In a message dated 1/19/2002 8:02:27 PM Eastern Standard Time, > judgejimmy@web.de writes: > > << ts not only Anderson or Enron, its also laws that give the = possibiltiy > to give EPS numbers that are so far away from the cash flow number, = that > the EPS number does not represent "a true and fair view" of the = current > situation > of the firm. You can not pay bills with EPS number, you only can = pay > for personel and material if you generate enough cash flow to cover = your=20 > costs > and to reach a profit margin and to take care of investments in you = business. > > A very good way to see quickly if the EPS Reporting is fair or not = - --> > > Check if the Cash Flow is above or at least equal to the EPS = numbers > reported. > If it is even below, than its always good to be really critical ... > > Cash Flow Price Ratio should be always below the PE Ratio. A good = sign=20 is > if the Cash Flow to Price Ratio is half the PE Ratio (thats my rule = of > thumb). > > Even better, use free cash flow (the money that is not needed even = after=20 > investments charged), > but this is not provided by any service I know ... > > I always wondered, why the investment community does not pay = attention=20 to > the differences > between both numbers (PE and PCF Ratio). > But as far I can tell, a low Price Cash flow Ratio, which is well = below=20 the > PE Ratio is > very seldem taken into account by the market and very seldem is = used as > "fuel" to > price up the stock price. > > So I only get really cautious if the PCF Ratio is not below the PE=20 Ratio. > > But with Enron, I gues, even this would not have helped, due to the = fact=20 > that they just reported > wrong numbers... > > See you > > Andreas > > > > -----Ursprungliche Nachricht----- > > Von: Dave Cameron [SMTP:dfcameron@yahoo.com] > > Gesendet am: Sunday, January 20, 2002 1:07 AM > > An: canslim@lists.xmission.com > > Betreff: [CANSLIM] Arthur Andersen > > > > > > --- Tom Worley <stkguru@netside.net> wrote: > > Tom writes: > > > > > Is it coincidence that Arthur Andersen is Enron's consultant / > > > advisor / auditor, and was also doing some of the same for = Sunbeam? > > > (some Sunbeam execs just settled a shareholder class action = lawsuit > > > for $15 million so they can concentrate on defending themselves > > > against fraud charges by the SEC). Sure, I'll pay you guys $15 > > > really big ones, but, hey, I'm still not admitting I did = anything > > > wrong with the company financial reports. Maybe we should be = buying > > > shares in companies making shredders?? This is the third big > > > financial scandal in recent years involving Andersen, and now > > > leading to cries from Congress for governmental regulation of > > > accounting firms. Great idea, let the politicians who rarely = can > > > balance a budget, and invented the concept of off-book = accounting, > > > regulate the accountants. > > > > This makes me wonder how "good" the earnings figures we get = really > > are. It seems logical that given the number of firms that Arthur > > Andersen serves as the accountants/auditors, there have to be = more > > out there that are fraudulent - and someone is benefiting. > > > > Furthermore, is it likely this behavior is unique to just = Andersen? > > > > I don't mean to sound like a conspiracy type; but it does give me = a > > dose of cynicism that we have to be even more diligent in our > > research. Enron was rarely, if ever, a CANSLIM stock, but the = lesson > > is valuable nonetheless. > > > > I suspect the Enron situation could change some legislation. = There > > are some big name trustee types demanding an investigation. I = blame > > Andersen more than Enron. Andersen is "supposed" to be = impartial; > > hence the auditing requirements. > > >> > > - > -To subscribe/unsubscribe, email "majordomo@xmission.com" > -In the email body, write "subscribe canslim" or > -"unsubscribe canslim". Do not use quotes in your email. - -To subscribe/unsubscribe, email "majordomo@xmission.com" -In the email body, write "subscribe canslim" or -"unsubscribe canslim". Do not use quotes in your email. - ------=_NextPart_000_00BE_01C1A19B.0AB32540 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable <!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN"> <HTML><HEAD> <META http-equiv=3DContent-Type content=3D"text/html; = charset=3Diso-8859-1"> <META content=3D"MSHTML 5.50.4611.1300" name=3DGENERATOR> <STYLE></STYLE> </HEAD> <BODY bgColor=3D#ffffff> <DIV>To add to Andreas' note. This is a great tie-in to the ELTE = discussion. If=20 ELTE is aggressive about capitalizing expenses related to software = development,=20 their EPS will look good but their cash flow will be lower and tell the = "real"=20 story of money left after they pay for everything year to year.</DIV> <DIV> </DIV> <DIV>An example of aggressive revenue reporting where EPS looked good = (high=20 Rev's) but the cashflow told the story--MSTR (March 2000). They = aggressively=20 reported deals as "revenues" even though they had no money in hand. In = this=20 case, cash flow was again lower than EPS numbers. The other way you can = tell=20 something is up is a high receivables number. A quick check on ELTE = shows=20 receivables are 40% of revenues. This doesn't necessarily mean they're = "up" to=20 anything, but should raise a yellow flag when reviewing the financials = or making=20 comparisons year to year.</DIV> <DIV> </DIV> <DIV>Katherine</DIV> <BLOCKQUOTE=20 style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; = BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px"> <DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV> <DIV=20 style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: = black"><B>From:</B>=20 <A title=3Djudgejimmy@web.de href=3D"mailto:judgejimmy@web.de">Andreas = Himmelreich</A> </DIV> <DIV style=3D"FONT: 10pt arial"><B>To:</B> <A = title=3Dcanslim@lists.xmission.com=20 = href=3D"mailto:'canslim@lists.xmission.com'">'canslim@lists.xmission.com'= </A>=20 </DIV> <DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Sunday, January 20, 2002 = 10:06=20 AM</DIV> <DIV style=3D"FONT: 10pt arial"><B>Subject:</B> AW: AW: [CANSLIM] = Arthur=20 Andersen</DIV> <DIV><BR></DIV>Jans,<BR><BR>cash-flow can be below EPS, since in order = to=20 derive you must<BR><BR>add non-cash expenses (e.g. appreciation of a = mashinery=20 park)<BR>minus non cash income (e.g. "Goodwill")<BR><BR>minus cash = expenses=20 that are not calculated in the earnings (like the <BR>famous "one = time"=20 charges)<BR>plus cash income that are not calculated in the earnings = (like=20 "one time" <BR>income)<BR><BR>The thing is that companies can very = often=20 choose totally legal if a cash <BR>income or cash expense reflects = into=20 EPS.<BR>The same for non cash income --> They can activate = "Goodwill" or=20 they can <BR>book it as EPS reflecting charges.<BR><BR>So it gets = dangerous if=20 the Price Cash Flow Ratio is below the PE Ratio, <BR>because = then<BR>the firms=20 potentially uses the legal possiblity of choosing how to book = <BR>their cash=20 expenses in a way<BR>so they are not reflected in the earnings (e.g. a = cash=20 expense of the EPS <BR>Book) extensivly.<BR><BR>Accountants refer this = then as=20 a unhealthy ballance sheet or "aggresive" <BR>reporting (Amazon is = King here,=20 they post an operative<BR>break even, which is useless because they = have a=20 negative Cash flow of a <BR>Dollar).<BR><BR>You will not belive what = you can=20 reach legally with this "choosing <BR>posibilities".<BR><BR>I worked = as a=20 controller of a Chamber of Comerce and Industry (which has <BR>slight=20 different reporting laws, but still you could "choose" a lot).<BR>The = people=20 controlling us (the members) had no clue on what hit them, no <BR>idea = of the=20 money the chamber really made (in this<BR>case much more then we = reported,=20 because we wanted to give the impression, <BR>that we are poor, so = they<BR>did=20 not have the idea of paying less fees). If they had questions you = <BR>simply=20 answered in such a complicated way, so they gave up ...<BR><BR>You can = legally=20 cook you earnings books, so you appear poorer or richer. I <BR>did not = like=20 this, so I decided to get another job ...<BR>Poorer is not very likely = in=20 these days due to the Raiders in the 1980s <BR>which bought poor = looking=20 companies that<BR>where acutally rich and sold them. Since this times=20 everybody tries to look <BR>at least as rich as they are.<BR><BR>I = found 579=20 Firms where the PE is below the PCF Ratio<BR><BR><A=20 = href=3D"http://moneycentral.msn.com/investor/invsub/finder/finderx.asp?Qu= ery=3DSV1">http://moneycentral.msn.com/investor/invsub/finder/finderx.asp= ?Query=3DSV1</A> =20 <BR>QF140Z05F215Z&Name=3DSearch2&Tickers=3D25<BR><BR><BR>NYCB = is a good=20 example:<BR><BR>PE 21<BR>PCF 62,5<BR><BR>So the PCF is a very = good=20 indicator on how much a firm uses the OFF BOOK <BR>cash = expenses.<BR>CASH FLOW=20 REPORTING CAN NOT BE COOCKED LEGALLY.<BR><BR>Another good way is to = look on=20 the taxes they pay. If the earnings are high <BR>and they do not pay = taxes,=20 there is a problem (this<BR>counts not for Israel Companies, due to = the fact=20 that they give huge tax <BR>breaks to their firms, especially in the = first=20 years of<BR>business).<BR><BR>See you<BR><BR>Andreas<BR><BR><BR>>=20 -----Ursprungliche Nachricht-----<BR>> Von: <A=20 href=3D"mailto:Spencer48@aol.com">Spencer48@aol.com</A>=20 [SMTP:Spencer48@aol.com]<BR>> Gesendet am: Sunday, January 20, 2002 = 4:16=20 AM<BR>> An: <A=20 = href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>= <BR>>=20 Betreff: Re: AW: [CANSLIM] Arthur Andersen<BR>><BR>> Dave, = Andreas and=20 Tom:<BR>><BR>> Andreas: How can = cash-flow=20 be below EPS, since in order to derive<BR>> cash-flow you must add = non-cash=20 expenses (like amortization expense,<BR>> and-possibly (see next = paragraph=20 as to why I am uncertain)-good-will=20 <BR>expense)<BR>><BR>> On = Wednesday or=20 Thursday's CNBC show with Lawerence Kudlow at 11PM <BR>EST,<BR>> = the show=20 revolved around the Enron scandal. I thought I heard mention=20 <BR>that<BR>> the Supervisory Board relating to Accounting = Practices was=20 doing away <BR>with<BR>> the balance sheet entry "Goodwill", but I = thought=20 it had already been <BR>done<BR>> away with several years=20 ago?<BR>><BR>> In any event, what = baffles=20 me is that just about everyone on the<BR>> business news remarks on = Enron's=20 OFF BOOK ACCOUNTS, but I've heard no one <BR>on<BR>> any of these = shows=20 lambast anyone at Enron (or Anderson<BR>> who-putatively-audited = them) who=20 decided to go with off-book accounting. <BR> It<BR>> makes one = wonder,=20 how many public corporation have off-book entries? It = <BR>also<BR>>=20 makes one wonder if DGO, WON and IBD recognize these entries as=20 <BR>legitimate-or<BR>> if they are even aware of them? I = guess the=20 bottom line is: How <BR>accurate is<BR>> an off-book entry, = and does=20 it accurately and legally reflect the<BR>> corporation's = profit/loss=20 statement, or is it instead a gambit a <BR>corporation<BR>> uses to = circumvent investment law and SEC supervision?<BR>><BR>>=20 jans<BR>><BR>><BR>> In a message dated 1/19/2002 8:02:27 PM = Eastern=20 Standard Time,<BR>> <A=20 href=3D"mailto:judgejimmy@web.de">judgejimmy@web.de</A> = writes:<BR>><BR>>=20 << ts not only Anderson or Enron, its also laws that give the=20 possibiltiy<BR>> to give EPS numbers that are so far away = from the=20 cash flow number, that<BR>> the EPS number does not represent = "a true=20 and fair view" of the current<BR>> situation<BR>> of the = firm. You=20 can not pay bills with EPS number, you only can pay<BR>> for = personel=20 and material if you generate enough cash flow to cover your <BR>>=20 costs<BR>> and to reach a profit margin and to take care of=20 investments in you <BR>business.<BR>><BR>> A very good way = to see=20 quickly if the EPS Reporting is fair or not = - --><BR>><BR>> Check=20 if the Cash Flow is above or at least equal to the EPS numbers<BR>> = reported.<BR>> If it is even below, than its always good to = be really=20 critical ...<BR>><BR>> Cash Flow Price Ratio should be = always=20 below the PE Ratio. A good sign <BR>is<BR>> if the Cash Flow = to Price=20 Ratio is half the PE Ratio (thats my rule of<BR>>=20 thumb).<BR>><BR>> Even better, use free cash flow (the = money that=20 is not needed even after <BR>> investments charged),<BR>> = but this=20 is not provided by any service I know ...<BR>><BR>> I = always=20 wondered, why the investment community does not pay attention = <BR>to<BR>>=20 the differences<BR>> between both numbers (PE and PCF=20 Ratio).<BR>> But as far I can tell, a low Price Cash flow = Ratio,=20 which is well below <BR>the<BR>> PE Ratio is<BR>> very = seldem=20 taken into account by the market and very seldem is used as<BR>> = "fuel"=20 to<BR>> price up the stock price.<BR>><BR>> So I = only get=20 really cautious if the PCF Ratio is not below the PE=20 <BR>Ratio.<BR>><BR>> But with Enron, I gues, even this = would not=20 have helped, due to the fact <BR>> that they just = reported<BR>> =20 wrong numbers...<BR>><BR>> See you<BR>><BR>> =20 Andreas<BR>><BR>><BR>> > -----Ursprungliche=20 Nachricht-----<BR>> > Von: Dave Cameron=20 [SMTP:dfcameron@yahoo.com]<BR>> > Gesendet am: Sunday, = January 20,=20 2002 1:07 AM<BR>> > An: <A=20 = href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>= <BR>> =20 > Betreff: [CANSLIM] Arthur Andersen<BR>> = ><BR>> =20 ><BR>> > --- Tom Worley <<A=20 href=3D"mailto:stkguru@netside.net">stkguru@netside.net</A>>=20 wrote:<BR>> > Tom writes:<BR>> ><BR>> = >=20 > Is it coincidence that Arthur Andersen is Enron's consultant=20 /<BR>> > > advisor / auditor, and was also doing some = of the=20 same for Sunbeam?<BR>> > > (some Sunbeam execs just = settled a=20 shareholder class action lawsuit<BR>> > > for $15 = million so=20 they can concentrate on defending themselves<BR>> > > = against=20 fraud charges by the SEC). Sure, I'll pay you guys $15<BR>> = > >=20 really big ones, but, hey, I'm still not admitting I did=20 anything<BR>> > > wrong with the company financial = reports.=20 Maybe we should be buying<BR>> > > shares in companies = making=20 shredders?? This is the third big<BR>> > > financial = scandal in=20 recent years involving Andersen, and now<BR>> > > = leading to=20 cries from Congress for governmental regulation of<BR>> > = >=20 accounting firms. Great idea, let the politicians who rarely = can<BR>> =20 > > balance a budget, and invented the concept of off-book=20 accounting,<BR>> > > regulate the = accountants.<BR>> =20 ><BR>> > This makes me wonder how "good" the earnings = figures=20 we get really<BR>> > are. It seems logical that = given the=20 number of firms that Arthur<BR>> > Andersen serves as the=20 accountants/auditors, there have to be more<BR>> > out = there that=20 are fraudulent - and someone is benefiting.<BR>> = ><BR>> =20 > Furthermore, is it likely this behavior is unique to just=20 Andersen?<BR>> ><BR>> > I don't mean to sound = like a=20 conspiracy type; but it does give me a<BR>> > dose of = cynicism=20 that we have to be even more diligent in our<BR>> >=20 research. Enron was rarely, if ever, a CANSLIM stock, but the=20 lesson<BR>> > is valuable nonetheless.<BR>> =20 ><BR>> > I suspect the Enron situation could change = some=20 legislation. There<BR>> > are some big name = trustee=20 types demanding an investigation. I blame<BR>> = >=20 Andersen more than Enron. Andersen is "supposed" to = be=20 impartial;<BR>> > hence the auditing = requirements.<BR>> =20 > >><BR>><BR>> -<BR>> -To = subscribe/unsubscribe, email=20 "<A = href=3D"mailto:majordomo@xmission.com">majordomo@xmission.com</A>"<BR>>= ;=20 -In the email body, write "subscribe canslim" or<BR>> -"unsubscribe = canslim". Do not use quotes in your email.<BR><BR>-<BR>-To=20 subscribe/unsubscribe, email "<A=20 = href=3D"mailto:majordomo@xmission.com">majordomo@xmission.com</A>"<BR>-In= the=20 email body, write "subscribe canslim" or<BR>-"unsubscribe = canslim". Do=20 not use quotes in your email.</BLOCKQUOTE></BODY></HTML> - ------=_NextPart_000_00BE_01C1A19B.0AB32540-- - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". Do not use quotes in your email.
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