![]() The theory is that this compensation is noncash and therefore shouldn’t be included in a discounted cash flow analysis to value the business. The cash flow statement also could be used to see cash flow impacts of items, which many consider to be noncash.įor example, in my experience, many companies use stock options for employee compensation, but subtract the related expense when arriving at their pro forma earnings. Seeing different trends over time in these two metrics was a red flag. Comparing operating earnings growth to operating and free cash growth was one of the first steps in my analysis of a company’s performance. There are many ways to use the cash flow statement. For example, it is far different to see a picture of One World Trade Center than to stand before it and strain your neck looking up. It is only by analyzing something in multiple dimensions that one gets a true sense of it. ![]() It provides another dimension of the performance of a company. In my former position as an analyst, I spent a lot of time poring over the cash flow statement. ![]() Charles Mulford and Eugene Comiskey state right up front, “t is hard to overstate the importance of operating cash flow and its closely related, carefully watched, and loosely defined metric, free cash flow, to fundamental measures of debt-service capacity and firm valuation.” The book goes on to describe how to critically analyze the cash flow statement in order to ascertain the sustainable cash-generating capacity of a company. In the book, Creative Cash Flow Reporting, Drs. Perhaps it’s time to highlight the GAAP-based cash flow statement and how it can be used and how it might be improved. In one of my prior columns, I addressed non-GAAP metrics more generally, but there appears to be a recurring view that companies and their investors need to have better communication about cash flow. Many companies and analysts adjust reported net income for noncash items in order to arrive at a figure that’s “closer to cash.” We also often hear that metrics like EBITDA (earnings before interest, taxes, depreciation, and amortization) can be better proxies for “cash flow.” There continues to be plenty of discussion in the financial reporting and investor communities about the proliferation of non-GAAP information, particularly around pro forma earnings.
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