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Cashflow

Q. What is cashflow?

The word "Cashflow" has been diluted to mean many different things. The only true measure of a company's cash flow is "Cash Flow From Operations" or Operational-cashflow. It is the first of the three major sections found in a company's quarterly and annual Cash Flow Statements.

Q. What is Cash Flow from Operations?
Cash Flow from Operations or Operational-cashflow shows all Income Statement and Balance Sheet changes that affect a company's flow of cash from its "daily," normal, or operational business activities. It monitors Balance Sheet and Income Statement items that reflect a change in a company's cash position. For example, a significant increase in a company's receivables, (could indicate difficulties in collecting invoices) or in its inventories, (could indicate product returns) are disclosed within a company's Cash Flow from Operations Report. Cash Flow from Operations is a "conservative" financial measure. It resides within the Operating Cash Flow section of a company's CASH FLOW STATEMENT that is filed quarterly with the SEC. There are three required accounting sub-sections in a Financial Statement; "The Income Statement," "The Balance Sheet," and "The Cash Flow Statement." Since the Cash Flow Statement reconciles the balance sheet and the income statement it is arguably the most important of all.

Q. What is positive cashflow from operations?
Positive Cashflow From Operations (Operational-cashflow) occurs when a company is generating more cash than it is spending. This enables a company to make investments or save its excess cash. This is analogous to your own situation when you save or invest your excess income.

Q. What is negative cashflow from operations?

Negative Cash Flow From Operations (Operational-cashflow) occurs when a company is spending more cash than its core business producing. This causes the company to utilize reserve investments or outside financing to make up the difference. This is analogous to you using your savings to pay your mortgage when you are out of work.

Q. What is cashflow from financing?

Cash Flow from Financing is the cash flow that a company generates from its borrowings or from the sale or offering of new shares to the public. It is the third of three sections that can be found in a company's quarterly and annual Cash Flow Statements. When a company borrows money or sells stock to expand its operations that activity contributes cashflow to the business. In most cases that financing activity does not reflect the health of the basic business. Similarly, if you borrow $10 from mom to buy more lemons for your lemonade stand, which contributes more cash to your enterprise, but that cash does not come from actual lemonade sales.

Q. What is cashflow from investments?
Cash Flow from Investments is the cash flow that a company generates from its investments. It is the second of three sections that can be found in a company's quarterly and annual Cash Flow Statements. Companies often have passive holdings or investments that may appreciate, devaluate or gather interest. When those holdings are liquidated or altered in some way, which can create an increase or decrease in the total cashflow of the company, but in most cases not reflect on the health of the basic business. Using the lemonade stand example again, if you took the $10 that mom originally loaned you to buy lemons and instead bought baseball cards that later sold for $12 you would have increased cashflow by $2 that would not have been any reflection on your core business of selling lemonade.

Q. What is CFPS?

CFPS is an acronym for Cash Flow Per Share and it is generally derived from Cash Flow or what is more commonly known as EBITDA. (See "What is EBITDA?" below.) CFPS and EBITDA are not part of a company's Financial Statements. CFPS can be calculated a variety of different ways. CFPS is normally calculated by dividing EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) by the total number of shares outstanding. Both are manufactured "creative accounting" interpretations that present a company in the best possible light. EBITDA's original use was for lenders to determine credit viability. Today these interpretations are used primarily by companies and Wall Street analysts to promote stock to an unwary public. Commonly, when EBITDA or CFPS are used in this way they are deceptively called "cash flow" or some form thereof. This twisted use of the word "cash flow" means that the investing public can only rely on StockMarketFunding.com "OPS" (Operational-cashflow Per Share). Unlike CFPS, EBITDA and other interpretive cash flow declarations StockMarketFudning.com "OPS" (Operational-cashflow Per Share) is the only one that is derived solely from the "actual" Corporate Financial Statements filed with the SEC. Fundamentally, any cash flow calculations based on EBITDA or CFPS must be contrasted with StockMarketFudning.com "OPS" (Operational-cashflow Per Share).

Enron demonstrated to the public an example of this abusive use of cash flow or its derivatives; see table below. Depending on the corporation or the Wall Street analyst, many other words, phrases or acronyms may be used to accomplish the same purpose; "Cash Earnings," "Pro forma Earnings," "EBITD" [Earnings Before Interest Taxes and Depreciation], "Free Cash Flow," and "Pro forma Cash Flow," among others.

Enron's OPS^TM vs. CFPS for 2001
Quarter	OPS^TM	CFPS
Q1 (3/31/01)	-$ .53	+$1.15
Q2 (6/30/01)	-$ .98	+$1.16
Q3 (9/30/01)	+$0.77	-$0.89

Enron's table shows the dramatic differences between StockMarketFudning.com "OPS" (Operational-cashflow Per Share) and CFPS, a manufactured, financial interpretation. Our "OPS" (Operational-cashflow Per Share) for Enron was negative for the first two quarters and positive for the third quarter of 2001. Enron's CFPS results were the exact opposite.

Q. What is EBITDA?
EBITDA is an acronym for "Earnings Before Interest Taxes Depreciation and Amortization." It is calculated by adding "selected" expense items such as Interest expenses, Income taxes, Depreciation and Amortization back into earnings or net income. By adding "selected" expense items back into to a company's net income "more positive" earnings or CFPS numbers can be manufactured. When utilizing EBITDA an analyst or CFO is actually stating, "This is what our earnings would have been if it were not for interest, taxes, depreciation and amortization.") Because it is based upon earnings, EBITDA is subject to the same "creative" accounting inherent in many earnings reports. EBITDA frequently does not reflect a company's true cash flow. Like CFPS, EBITDA is a manufactured "creative accounting" interpretation that presents a company in the best possible light. EBITDA's original use was for lenders to determine credit viability. Today these interpretations are used primarily by companies and Wall Street analysts to promote stock to an unwary public. Commonly, when EBITDA or CFPS are used in this way they are deceptively called "cash flow" or some form thereof. This twisted use of the word "cash flow" means that the investing public can only rely on SMF' "OPS" (Operational-cashflow Per Share). Unlike CFPS, EBITDA and other interpretive cash flow declarations, StockMarketFudning.com "OPS" (Operational-cashflow Per Share) is the only one that is derived solely from the "actual" Corporate Financial Statements filed with the SEC. Fundamentally, any cash flow calculations based on EBITDA or CFPS must be contrasted with StockMarketFudning.com "OPS" (Operational-cashflow Per Share).

Enron demonstrated to the public an example of this abusive use of "cash flow" or its derivatives; see table below. Depending on the corporation or the Wall Street analyst, many other words, phrases or acronyms may be used to accomplish the same purpose; "Cash Earnings," "Pro forma Earnings," "EBITD" [Earnings Before Interest Taxes and Depreciation], "Free Cash Flow," and "Pro forma Cash Flow," among others.

Q. Are OPS^TM and CFPS similar?
StockMarketFudning.com "OPS" (Operational-cashflow Per Share) and CFPS are vastly different financial measures. "OPS" is derived from a corporations' actual quarterly or annual Cash Flow Statement. CFPS, is derived from EBITDA (or one of its derivatives) which is a manufactured calculation that does not appear in a company's Financial Statement. OPS is based on actual accounting measures and CFPS is based on "creative" accounting measures. Fundamentally, any cash flow calculations based on EBITDA or CFPS must be contrasted with StockMarketFudning.com "OPS" (Operational-cashflow Per Share). Enron presents a classic example of the stark contrast between "OPS" and CFPS; see table below.

EPS

Q. What is EPS?

EPS is an acronym for "Earnings Per Share," and it is calculated by dividing Net Income by the total number of shares outstanding. This Net Income is commonly referred to as "Earnings." Since Net Income or EPS does not reflect a company's true cash that it is generating from its business operations both are subject to "creative" accounting. Therefore, both EPS and Net Income can be manufactured to present a company in the best possible light. For many companies EPS, or net income reflects a company's "booked," but not cash profits from business transactions. Just because business transactions have been accounted for does not necessarily mean that the money owed will ever be collected. Take a lemonade stand for example. If the thirsty kids down the block promise to pay later, for lemonade that they drink today, this transaction according to current accounting standards, would be "booked" as net income, or EPS. This EPS is then reported to the public even though the money has not been collected and may never be paid. Today many of these "creative accounting" interpretations are used in simple ways such as this, or in varying degrees of complexity by companies to primarily promote stocks to an unwary public.

Fundamentally, any reported EPS or Net Income must be contrasted with StockMarketFudning.com "OPS" (Operational-cashflow Per Share). In the table below you can see how this contrast applied to Enron.

Q. Why is Wall Street so focused on quarterly EPS (Earnings Per Share)?
For many decades Wall Street has used quarterly EPS (Earnings Per Share) as the single most important indicator of that company's performance. In the early days of the stock market this approach served as a quick and helpful guide to a company's value. In recent decades, however, creative accounting, driven by merger and acquisition activity, has caused EPS to no longer serve as the best primary indicator of success. Wall Street's insatiable appetite for EPS (Earnings Per Share) growth has fostered and rewarded creative accounting. EPS has become so important that stocks will often exhibit volatility on just pennies per share swings in earnings. Some of the largest public companies in the country are in financial difficulty because no one is paying attention to their other vital signs, such as "OPS." See, "The Earnings Game," Harvard Business Review, June 2001.

Q. How can OPS validate EPS?
The best way to evaluate quality is to compare operating cash flow per share (OPS) to reported EPS. If OPS is greater than reported EPS, earnings are of a high quality because the company is generating more cash than is reported on the income statement. If OPS is less than reported EPS, it means that the company is generating less cash than is represented by reported EPS. In this case, EPS is of low quality because it does not reflect the negative operating results of the company and overstates the actual (cash) operating results.

StockMarketFudning.com believes the answer lies in a careful examination of earnings per share (EPS) figures in the context of "OPS" (Operational-cashflow Per Share). We have analyzed the Cash Flow Statements and the Income Statements of thousands of U.S. publicly traded companies and have identified a series of conditions that constitute early warning signs of a company's health. We have named these conditions, when combined, "The EPS Syndrome," and have filed patents on their discovery. Additionally, negative "OPS" (Operational-cashflow Per Share) constitutes evidence that a company should be closely monitored. Fundamentally, any cash flow calculations based on EBITDA or CFPS must be contrasted with StockMarketFudning.com "OPS" (Operational-cashflow Per Share).

Q. What are earnings?
Earnings are the booked profits from business transactions. Just because these business transactions have been accounted for does not necessarily mean that the money has been collected. Take a lemonade stand for example. If the thirsty kids down the block promise to pay you later for lemonade they drink today the potential profit from that could be "booked" and reported as earnings, but would not turn into cashflow from operations until the kids came back with the money. Today many of these "creative accounting" interpretations are used in simple ways such as this, or in varying degrees of complexity by companies to primarily promote stocks to an unwary public.

OPS^TM

Q. What is OPS ^TM(Operational-cashflow Per Share)?
OPS^TMis StockMarketFudning.com acronym for "Operational-cashflow Per Share." "OPS" is calculated by dividing a company's Cashflow from Operations by the total number of shares outstanding. SMF created "OPS" (Operational-cashflow Per Share) to focus stockholders on the real values of a company as opposed to the artificial values that can be produced by creative accounting under EPS, CFPS, or EBITDA. (See: "What are EPS, CFPS, and EBITDA).

Q. Why compare OPS^TM (Operational-cashflow Per Share) against EPS (Earnings Per Share)?
In its simplest form Earnings Per Share may reflect the booked profits or losses from a variety of activities including, but not limited to, the sales from the company's core operations. "OPS" (Operational-cashflow Per Share) more accurately reflects the actual cash that the company is generating from its core business. EPS does not reflect the actual cash that a business is generating as it includes non-cash items such as receivables and other non-cash items.

OPS Rankings^TM

Q. What are OPS Rankings^TM?
SMF monitors a public company's Operational-cashflow Per Share ("OPS") and assigns it an "OPS Ranking." "OPS Rankings" are based on computer-generated, precise and objective calculations. Rankings are upgraded with each company's quarterly financial report. Rankings are scaled 1 through 8, with number one (1), being the highest ranking and number eight (8), the lowest. A "Ratings Suspended" status is given for all companies diagnosed with, "The EPS Syndrome^TM" during the most recent four quarters.

Earnings Manipulation

Analyst that work on Wall St. should not be believed as far as upgrades and downgrades on a publicly traded company. What an investor or trader needs to do is understand the various types of earnings manipulations so they can walk through the muddy waters of corporate America. You will find below a couple of key examples of what we’re talking about.

Wall Street is a harsh judge when it comes to missing earnings estimates. It is not uncommon for a stock to significantly depreciate when quarterly earnings are below the consensus estimate. This is especially true for aggressive growth stocks, because there is often a high degree of optimism embedded into the price and therefore less room for error.

Thus, the incentive for management to meet or beat estimates is enormous. This can lead to earnings manipulation by companies that fall short of the intended goal. Even though it may seem like a questionable practice, there are some legal accounting adjustments that can be made to earnings to make them look better that many companies engage in. A few accounting tweaks late in a quarter can help to achieve a desired result. Although these “tweaks” might be legal, earnings manipulation can come back to haunt a company if it is not truly growing.

Two common ways a company can manage earnings are:

• Pension Plans – Companies that have Defined Benefit Plans have to report their pension expense which goes against earnings. This number can be artificially reduced by deliberately assuming a low rate of expected compensation growth or are a higher expected return on plan assets. Both of these will lower the reported pension expense and increase net income. At some point, however, the company will need to readjust the figures to meet its true pension obligations.

• Depreciation Method - Depreciation is the process by which a company allocates an asset's cost over the duration of its useful life. A firm can tinker with the method of depreciation and overestimate the salvage value of the asset, both of which would increase reported earnings.

If a corporate executive wants to be very aggressive he can set aside a “reserve” fund from good years to use in bad years. The idea is to smooth out earnings as Wall Street likes consistency rather than wild swings in results. Smoothing earnings is not permitted by the SEC, and it ends badly for shareholders when the jar runs dry.

Fortunately, there a ways for an investor to ensure a company is truly growing as opposed to simply doing a good job of managing the numbers. One thing to look at is sales growth. No firm can consistently grow earnings without also growing sales. Aggressive growth stocks should be growing sales at a comparable rate to earnings, otherwise trouble is inevitable down the road. A more mature company has more capacity to wring out earnings growth by cutting costs, but not a younger firm. (Keep in mind that sales can be manipulated, but doing so is harder and is more likely to be uncovered by an audit, because of their affect on receivables and inventory.)

Cash flows are another place to gauge a company’s health, especially operating cash flows. These are the cash flows from the firm’s main operations, and growth in this metric is crucial in order for continued success. Operating cash flows measure whether a company is actually increasing its cash balance through its normal activities or if it is using more cash than it getting from its customers. There are many stories of aggressive growth companies that filed for bankruptcy because they could not generate cash to pay the bills. Cash flows are very difficult to manipulate without violating common accounting standards.

StockMarketFunding.com Conclusion

Earnings are an extremely important metric to keep an eye on, but are rife with opportunities for manipulation by sneaky management teams. Continue to keep an eye on earnings and earnings estimate trends, but also beware various tricks that firms can play to spice up their reported results. As an alternative, study the company’s sales growth and cash flow growth, especially cash flow from operations.Our only goal here at StockMarketFudning.com is to make sure that YOU succeed by taking advantage of all our programs that will help you reach your desired success.

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