Should you include changes in working capital? See this comment.

“If we think through these questions, we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in (c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)”

http://www.avicennaaccoun…

Another example of Bad business.

See what happened to the stock price after years of negative FCF and bad management.

a)there’s actually A POST ON GOOGLE FINANCE FROM SENIOR MANAGEMENT trying to defend its bad business practices saying it is “the economy’s fault completely”.

b)Somehow those 18 acquisitions in 12 months had nothing to do with it and they were successful making those acquisitions.

c) they are selling those acquisitions now because they have too much debt and their interest costs went up(debt they got for acquiring those companies). Classic example that fits analogy on Citigroup.

d)In the beginning of the year, one of senior management of its Security Division quit because he said that the CEO is hiding the reality of the numbers presented through GAAP.(Accounting Scandal)

e)To give you a picture: Insiders have even been selling ALOT when the stock was 20$ and it is now 1.40$. (how can he be true partners with shareholders if he’s selling??)

You were so right about the CRONIES on Wall-Street but they are also there in TSX.

What’s alarming is that you can clearly see that the senior manager has no clue what the hell is going on! (he actually took the time to tell the poster that he’s heavily invested in the company because recent troubles are SOLELY the economy’s fault. Isn’t that troubling that HE’S MANAGING OUR MONEY?)

My neighbor follows Buffet’s teachings(he likes your blog), TYLER let me know and I was just BLOWN away when I read the lively discussion but everything the other posters have said seems true.

I wonder what you all think

Net income is an accounting standard; cash flows track the actual flow of cash through a business. Think of it in terms of your personal finances. More likely than not, your annual tax return does not take into account all of your daily spending and is not an accurate reflection of your personal wealth and financial well being.

On your tax return, for example, you may be able to deduct mortgage interest on your home, but not your principal payments. Though your tax return might show a relatively high (or pretty) net income (net of mortgage interest), if you aren’t generating enough cash to pay your mortgage, you’ll be out on your ear in no time.

Tax returns and net income are for accountants and the IRS; cash flow is for investors. Make sense?

If a company is widly issuing grants without repurchasing stock, dilution can get out of hand. If the company matches that with open market share repurchases, it is somewhat of a wash because the company could have just cut a check to the employees.

Because stock options are now expensed (reflected in net income), that will appear in your owner earnings. Before June 2005, that was not the case as GAAP didn’t require options to be expensed.

Nelson: In the case of outright fraud, nothing can be trusted. Fortunately, owner earnings usually detect fraud before it gets to the point of fraud. That is, when a company can’t generate enough cash to keeps its operations going, it may turn to fraud. But, when a company is operating successfully, it has no reason to operate or report fraudulently. Any such fraud is usually minor as opposed to Enron-style, major fraud.

How is a companies FCF impacted when a company grants its employees stock or options to be vested over a period of time. Shouldn’t these grants and impact the FCF numbers? What if the company repurchases stock to cover the grants?

Thanks,

dave miller