Go to Jeff Salisbury LWGate Home Page.From: Gene Ricci <genr@swbell.net>
Subject: [CANSLIM] Cash-Flow
Date: Sun, 19 May 2002 15:33:01 -0500
Next Article (by Date): Re: [CANSLIM] New using DGO John Lessnau
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I was reading Jan's note on cash-flow and got this about the same time.. =
from Schwab... what do you think?
What is the Statement of Cash Flows?=20
=20
=20
Think of cash as the lifeblood of every business. Without cash =
flow, no business can function-and without an accurate picture of cash =
flow, no investor can have a complete picture of a company.=20
A company's statement of cash flows reflects how readily the =
business can pay its bills, and it provides important information about =
a company's sources and uses of cash. But measuring cash flow solely =
from a balance sheet or an income statement is difficult and potentially =
misleading. That's because not all revenue is received when a company =
earns it, and not all expenses are paid when incurred.=20
The difference between an income statement and a statement of cash =
flows is roughly analogous to the difference between a credit card =
statement and a checkbook ledger. A credit card statement includes =
charges that haven't been paid off yet, while an updated checkbook =
ledger indicates where cash has been spent and whether there's enough to =
pay off debts like a credit card bill. Similarly, a company's expenses =
and revenues are recorded on an income statement, regardless of whether =
cash has changed hands yet. A statement of cash flows, on the other =
hand, traces where cash came from and where it was used.=20
The statement also separates cash generated by the normal =
operations of a company from that gleaned through other investing and =
financing activities, as seen in the sample statement of cash flows of =
the hypothetical XYZ Corp.=20
Statement of cash flows for XYZ Corp. for the year ending
Dec. 31, 1999 (in millions)=20
=20
From operations =20
Net income $30=20
Plus depreciation 15=20
Plus decrease in receivables (less increase) (20)=20
Less increase in inventories (10) =20
Plus increase in accounts payable (less decrease) 0 =20
Net increase (decrease) in cash from operations 15 =20
=20
From investing =20
Less purchase of equipment (150) =20
=20
From financing =20
Bonds issued 100 =20
=20
Net increase (decrease) in cash (35) =20
Cash at beginning of year 127 =20
Cash at end of year $92=20
Cash flow from operations=20
Cash flow from operations starts with net income (from the income =
statement) and adjusts out all of the non-cash items. Income and =
expenses on the income statement are recorded when a company earns =
revenue or incurs expenses, not necessarily when cash is received or =
paid. To figure out how much cash the company received or spent, net =
income is adjusted for any sales or expenditures made on credit and not =
yet paid with cash.=20
Examples of these adjustments are shown above. XYZ had $20 million =
in sales to customers who had not paid the company as of the end of the =
year, so this increase in receivables is subtracted. XYZ also reported =
$15 million in depreciation expense (the portion of long-lasting assets, =
such as buildings, that is written off each year); depreciation is not a =
cash item, so it is added back. Finally, XYZ purchased $10 million of =
additional inventory that was not sold as of year end. Because the =
inventory was not sold, it is not considered an expense. But because =
cash was used in the purchase, the $10 million is subtracted from net =
income. Net cash received from XYZ's operations, after the above =
adjustments, was $15 million.=20
Cash flow from investing=20
Cash flow from investing includes cash received from or used for =
investing activities, such as buying stocks in other companies or =
purchasing additional property or equipment. XYZ Corp. had no cash =
receipts from investing in 1999 but spent $150 million to purchase =
equipment.=20
Cash flow from financing=20
Cash flow from financing activities includes cash received from =
borrowing money or issuing stock and cash spent to repay loans. XYZ =
Corp. received $100 million in cash from issuing bonds in 1999.=20
Sizing up operating performance=20
Of the three main sources of cash flow, analysts look to that from =
operations as the most important measure of performance. If operations =
alone don't generate positive cash flow, that may be cause for concern. =
In addition, a decrease in cash flow due to a sharp increase in =
inventory or receivables can signal that a company is having trouble =
selling products or collecting money from customers. However, analysts =
look at the relative amount of these changes-if accounts receivable have =
gone up by the same percentage as sales revenues, the increase may not =
be unusual.=20
The point of cash flow analysis is to be certain that a company =
isn't tying up funds in assets that are not generating enough cash flow =
to meet obligations-so it's an important piece of the financial puzzle.=20
=20
Cash-Flow is a good item to check to see if earnings are at least =
equal=20
to the money coming in. However, to me it would seem that this test =
would=20
only be valid for companies that needn't invest in a lot of R&D (eg. =
consumer=20
and retail companies).
Companies with a lot of R&D (which are a % of sales, and which =
are=20
deducted from earnings as an expense and not added back in to arrive =
at=20
Cash-Flow) would seem to be an exception to your hard and fast =
Cash-Flow rule=20
(ie. Cash-Flow positive).=20
Moreover, it would seem to me that companies which are investing =
in a=20
lot of R&D would be the same companies which WON suggests are in the =
most=20
dynamic and rewarding industries (eg. technology stocks or biomed =
stocks).
I'll give you an example of a stock which has poor cash-flow, but =
has a=20
very high R&D: ENZN. One of the reasons I'm looking at it is because =
of its=20
sparkling earnings and sales (sequential, quarterly, and yearly). Of =
course,=20
the chart looks terrible, but its fundamentals (as far as I'm =
concerned) even=20
with its poor cash-flow, does not eliminate it.
jans
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<DIV><FONT face=3D"Comic Sans MS">I was reading Jan's note on =
cash-flow and=20
got this about the same time.. from Schwab... what do you =
think?</FONT></DIV>
<DIV><FONT face=3D"Comic Sans MS"></FONT> </DIV>
<DIV> </DIV>
<DIV>
<TABLE cellSpacing=3D0 cellPadding=3D0 width=3D435 border=3D0>
<TBODY>
<TR>
<TD><FONT class=3DbodyFontBold face=3D"Arial, Helvetica" =
size=3D2><B>What is the=20
Statement of Cash Flows?</B></FONT></TD></TR>
<TR>
<TD><FONT class=3DbodyFontSmall face=3D"Arial, Helvetica" =
size=3D1></FONT></TD></TR>
<TR>
<TD height=3D10></TD></TR></TBODY></TABLE><!-- END article header B =
- --><!-- ARTICLE COPY --><!-- opening -->
<TABLE cellSpacing=3D0 cellPadding=3D0 width=3D435 border=3D0>
<TBODY>
<TR>
<TD><FONT class=3DbodyFont face=3DARIAL,HELVETICA size=3D2>Think of =
cash as the=20
lifeblood of every business. Without cash flow, no business can=20
function=97and without an accurate picture of cash flow, no =
investor can=20
have a complete picture of a company.=20
<P>A company's statement of cash flows reflects how readily the =
business=20
can pay its bills, and it provides important information about a =
company's=20
sources and uses of cash. But measuring cash flow solely from a =
balance=20
sheet or an income statement is difficult and potentially =
misleading.=20
That's because not all revenue is received when a company earns =
it, and=20
not all expenses are paid when incurred.=20
<P>The difference between an income statement and a statement of =
cash=20
flows is roughly analogous to the difference between a credit card =
statement and a checkbook ledger. A credit card statement includes =
charges=20
that haven't been paid off yet, while an updated checkbook ledger=20
indicates where cash has been spent and whether there's enough to =
pay off=20
debts like a credit card bill. Similarly, a company's expenses and =
revenues are recorded on an income statement, regardless of =
whether cash=20
has changed hands yet. A statement of cash flows, on the other =
hand,=20
traces where cash came from and where it was used.=20
<P>The statement also separates cash generated by the normal =
operations of=20
a company from that gleaned through other investing and financing=20
activities, as seen in the sample statement of cash flows of the=20
hypothetical XYZ Corp.=20
<P>
<TABLE cellSpacing=3D1 width=3D"100%" border=3D1>
<COLGROUP align=3Dleft width=3D"75%">
<COLGROUP span=3D2 width=3D"5%">
<COLGROUP span=3D3 width=3D"20%">
<TBODY>
<TR>
<TH bgColor=3D#ffcc00 colSpan=3D3><FONT face=3Darial,helvetica =
size=3D2>Statement of cash flows for XYZ Corp. for the year=20
ending<BR>Dec. 31, 1999 (in millions)</FONT></TH></TR>
<TR>
<TH colSpan=3D3></TH></TR>
<TR>
<TH bgColor=3D#ffffcc><FONT face=3Darial,helvetica =
size=3D2>From=20
operations</FONT></TH>
<TD></TD>
<TD></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Net =
income</FONT></TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2>$30</FONT></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Plus =
depreciation</FONT></TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2>15</FONT></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Plus decrease in =
receivables=20
(less increase)</FONT></TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2>(20)</FONT></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Less increase in=20
inventories</FONT> </TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica size=3D2>(10)=20
</FONT></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Plus increase in =
accounts=20
payable (less decrease) </FONT></TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2><U>0</U></FONT>=20
</TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Net increase =
(decrease) in=20
cash from operations</FONT></TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2>15</FONT> </TD></TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD></TR>
<TR>
<TH bgColor=3D#ffffcc><FONT face=3Darial,helvetica =
size=3D2>From=20
investing</FONT> </TH>
<TD></TD>
<TD></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Less purchase of=20
equipment</FONT> </TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica size=3D2>(150) =
</FONT></TD></TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD></TR>
<TR>
<TH bgColor=3D#ffffcc><FONT face=3Darial,helvetica =
size=3D2>From=20
financing</FONT> </TH>
<TD></TD>
<TD></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Bonds issued</FONT> =
</TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2>100</FONT> </TD></TR>
<TR>
<TD></TD>
<TD></TD>
<TD></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Net increase =
(decrease) in=20
cash</FONT> </TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica size=3D2>(35)=20
</FONT></TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Cash at beginning of =
year</FONT> </TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica =
size=3D2><U>127</U></FONT>=20
</TD></TR>
<TR>
<TD><FONT face=3Darial,helvetica size=3D2>Cash at end of =
year</FONT> </TD>
<TD></TD>
<TD align=3Dmiddle><FONT face=3Darial,helvetica=20
size=3D2><U>$92</U></FONT></TD></TR></TBODY></TABLE>
<P><FONT class=3DbodyFontBold face=3D"Arial, Helvetica" =
size=3D2>Cash flow from=20
operations</FONT> <BR>Cash flow from operations starts with net =
income=20
(from the income statement) and adjusts out all of the non-cash =
items.=20
Income and expenses on the income statement are recorded when a =
company=20
earns revenue or incurs expenses, not necessarily when cash is =
received or=20
paid. To figure out how much cash the company received or spent, =
net=20
income is adjusted for any sales or expenditures made on credit =
and not=20
yet paid with cash.=20
<P>Examples of these adjustments are shown above. XYZ had $20 =
million in=20
sales to customers who had not paid the company as of the end of =
the year,=20
so this increase in receivables is subtracted. XYZ also reported =
$15=20
million in depreciation expense (the portion of long-lasting =
assets, such=20
as buildings, that is written off each year); depreciation is not =
a cash=20
item, so it is added back. Finally, XYZ purchased $10 million of=20
additional inventory that was not sold as of year end. Because the =
inventory was not sold, it is not considered an expense. But =
because cash=20
was used in the purchase, the $10 million is subtracted from net =
income.=20
Net cash received from XYZ's operations, after the above =
adjustments, was=20
$15 million.=20
<P><B class=3DbodyFontBold>Cash flow from investing</B> <BR>Cash =
flow from=20
investing includes cash received from or used for investing =
activities,=20
such as buying stocks in other companies or purchasing additional =
property=20
or equipment. XYZ Corp. had no cash receipts from investing in =
1999 but=20
spent $150 million to purchase equipment.=20
<P><B class=3DbodyFontBold>Cash flow from financing</B> <BR>Cash =
flow from=20
financing activities includes cash received from borrowing money =
or=20
issuing stock and cash spent to repay loans. XYZ Corp. received =
$100=20
million in cash from issuing bonds in 1999.=20
<P><B class=3DbodyFontBold>Sizing up operating performance</B> =
<BR>Of the=20
three main sources of cash flow, analysts look to that from =
operations as=20
the most important measure of performance. If operations alone =
don't=20
generate positive cash flow, that may be cause for concern. In =
addition, a=20
decrease in cash flow due to a sharp increase in inventory or =
receivables=20
can signal that a company is having trouble selling products or =
collecting=20
money from customers. However, analysts look at the relative =
amount of=20
these changes=97if accounts receivable have gone up by the same =
percentage=20
as sales revenues, the increase may not be unusual.=20
<P>The point of cash flow analysis is to be certain that a company =
isn't=20
tying up funds in assets that are not generating enough cash flow =
to meet=20
obligations=97so it's an important piece of the financial puzzle.=20
</P></FONT></TD></TR></TBODY></TABLE></DIV>
<BLOCKQUOTE=20
style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; =
BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
<DIV> Cash-Flow is a good item to check to see =
if=20
earnings are at least equal <BR>to the money coming in. However, =
to me=20
it would seem that this test would <BR>only be valid for companies =
that=20
needn't invest in a lot of R&D (eg. consumer <BR>and retail=20
companies).<BR><BR> Companies with a lot of =
R&D=20
(which are a % of sales, and which are <BR>deducted from earnings as =
an=20
expense and not added back in to arrive at <BR>Cash-Flow) would seem =
to be an=20
exception to your hard and fast Cash-Flow rule <BR>(ie. Cash-Flow =
positive).=20
<BR><BR> Moreover, it would seem to me that =
companies=20
which are investing in a <BR>lot of R&D would be the same =
companies which=20
WON suggests are in the most <BR>dynamic and rewarding industries (eg. =
technology stocks or biomed stocks).<BR><BR> =
I'll give=20
you an example of a stock which has poor cash-flow, but has a <BR>very =
high=20
R&D: ENZN. One of the reasons I'm looking at it is =
because of=20
its <BR>sparkling earnings and sales (sequential, quarterly, and=20
yearly). Of course, <BR>the chart looks terrible, but its =
fundamentals=20
(as far as I'm concerned) even <BR>with its poor cash-flow, does not =
eliminate=20
it.<BR><BR>jans<BR><BR></DIV></BLOCKQUOTE></BODY></HTML>
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