Cash Flow Statement
The cash flow statement provides information:
- about a company’s cash receipts and cash payments during an accounting period
- about a company’s operating, investing and financing activities
- about the impact of accrual accounting events on cash flows
- to assess the firm’s liquidity, solvency and financial flexibility
An analyst can use the the statement of cash flow to determine whether:
- regular operations generate enough cash to sustain business
- enough cash is generated to pay off existing debts
- firm is likely to need additional financing
- unexpected obligations can be met
- firm can take advantage of new business opportunities as they arise
How to Spot a Polly Peck or Bernie Madoff
CFO flees to Romania to his beach house, where he will live the rest of his days in exile. Clearly he is guilty of fleecing thousands of shareholders of money. The shareholders clamor for the government to arrest him for fraud. CNBC reports that he is guilty. MSNBC and Bloomberg report that he is guilty. A small financial analyst takes a retrospective look at the evidence and concludes that the CFO is not, in fact, guilty of anything. In fact, according to the small financial analyst, the CFO did nothing wrong whatsoever.
How can the two be right? Or, can they both be right? No, they can’t, and the answer is the balance sheet.
When people lose money, it is often the case that they want to blame others. What is well known, though, is that in order to offer stock, a company must do so to “sophisticated” investors, i.e. people who know better and do their homework. Long story short, if someone loses money, ultimately the investor is to blame, for not doing his homework. These people that want to blame others for their own faults get heard though. The government tries to rush in and save the day. Ultimately the government gets it wrong, because … that’s what the government does best.
So how could a small time financial analyst get what massive media outlets and huge governmental agencies miss? The balance sheet!
The financial analyst simply takes a look at the balance sheet and sees that the CFO was doing nothing to “fleece” investors. More than likely, it was the government that was to blame for the loss, if anyone needs to be blamed.
- Global Dynamics has a subsidiary in Greece
- they lend the Greek subsidiary $1M @ 5% interest
- Continue reading How to Spot a Polly Peck or Bernie Madoff: What is a Balance Sheet
How to Spot Companies in Trouble
You see on CNBC and MSNBC and Bloomberg all the time, the CFO or CEO come on and say, “my company is enjoying a 20% profit with a 25% margin.” You as the viewer think to yourself, well that looks fantastic. Three months later the reporter informs everyone that the company is in bankruptcy court. You think to yourself, well that escalated quickly.
You see, a CEO can publicly say that his company made a profit. You take the sales minus the cost of goods and you get profits. Did the CEO lie? No! In the most simple terms, he is absolutely correct. But, here’s the rub. Costs of goods does not mean the cost of running the business. Cost of goods does not include the cash flow. Without going back over the cash flow statement, I’d like to show how the profit the CEO is talking about is not the “profit”.
- Sales – cost of goods = gross profit ( this is what the CEO is talking about on TV)
- gross margin = gross profit / sales ( this is the margin he quotes )
- operating profit=operating cost – gross profit ( now you get into how much it costs to operate the business on a day to day basis )
- ebitda d= depreciation (physical assets, like a company van) a=amortization (intellectual assets, like a brand name)
- operating margin=operating profit / sales ( this gives a good indicator of where some costs can be cut and how badly the company is operating )
- pbit / ebit = profit before interest and tax / earning before itnerest and tax ( this figure gives us an indicator of how badly taxes and interest are hitting us )
- profit before tax (pbt) = interest – operating profit ( if the company has loans, this gives us the exact amount needed to pay the interest )
- Continue reading How Seemingly Profitable Companies Go Bankrupt and How to Spot Them
The Bain Capital Lie
It was a topic most Americans were sorely ignorant about and yet, driven into a frenzy over, Bain Capital. It probably sunk Mitt Romney more than any other issue. People saw past his Mormon cultism. People overlooked his tremendous personal wealth, which Democrats always try and say is a bad thing. People even overlooked his Romneycare, since Obamacare is already passed and threatens to turn this country into a 3rd world nation.
All of those claims were able to be ignored, but the Bain Capital issue was even brought up the day before the election. But, when one does a bit of research, they find that Bain Capital is not an inherently evil company.
Let’s compare it to a real life scenario:
- a person doesn’t work their 40 hours for 2 weeks and take home half the paycheck they normally get
- they cannot afford the bills they have
- the bill collectors start calling, due to not receiving payment
- the person goes to a bank, who refuses to give them a personal loan
- the person then goes to a payday loan place that lends them the money, but gives them a very high interest rate
- the person pays their bills
- the person is again short on their paycheck
- the payday loan place start repossessing the person’s items
- the person curses the payday loan place and tries to get them shut down or take some other action against them
I have written many times about how Bank of America is lying about their record profits. People never believe me. They read the headlines. They hear the news. They shrug and say, I, meaning me Shakaama, couldn’t possibly know more than the main stream media, wallstreet analysts and the whole Obama gang.
I have a trick up my sleeve today that you will love. Well, you might actually get a kick out of it. I can teach you, to prove the wallstreet analysts wrong by yourself. Here is my patented 10 second analyst course.
The technical, narrow definition of this term is: an increase in the rate of profit a company makes on a product.
However in broader terms it can defined as: In long-term reference, a measure of a company’s net profit margin in the latest reported quarter divided by profit margin in the fiscal year previous. In short-term reference, a measure of a company’s net profit margin in the latest reported quarter divided by profit margin in the quarter immediately preceding.
So we can be talking about a specific product, or the net profit margins overall. We simply apply the term as narrowly or broadly as we like.
The news today applies to Amazon’s quarterly report.
The Amazon (AMZN) bull case has pivoted to a story of margin expansion from revenue growth after the company surprised analysts with better-than-expected profit margins during Q4. A number of firms are out with price target increases, citing margin expansion as a major factor. PT hikes: Barclays to $260 from $245; JPMorgan to $333 from $245; Baird to $325 from $300; BofA to $315 from $300; Credit Suisse to $334 from $301. AMZN +8.3% premarket to $281.62. – Seeking Alpha
In my opinion, I think overall Amazon is not doing as well as it appears, regardless of the news. I have a bearish outlook on the company, from observing their day to day operations. It is one of the few companies that I actually pay attention to. I do not consider their fundamentals good. On a technical standpoint if this trends up, you can still make money, since this news came out. But as a swing trader or long term investor, I think the fundamentals are just not there.