If you are predicting growth in stock prices using earnings reports, it is interesting to learn about the quality of the information provided in those reports.
The results are very interesting. Their sentiment is that as high as 20% of the reported earnings of publicly traded companies are misrepresented. The study gives many interesting reasons they feel this happens.
It is very readable. I found the table of "Earnings Misrepresentation Red Flags" on page 17 particularly interesting. The CFO's felt a correlation between earnings and operating cash flow was a very important indicator of the quality of reported earnings.
You might incorporate a quick check on this into your stock studies. It is easy to do. If you enter a Ticker on the Morningstar.com site, you are taken to a page of overview information. If you scroll down, you'll see a section labeled "Financials" which displays a few of the key financial results in a table.
If you compare the line labeled "Net Income" to the one labeled "Cash From Operations", you can see what the CFO's are referring to. Since it is cash flow that truly drives the value of a business, you want to see that the earnings number truly represents the type of Cash from operations that the company has to use to grow its business and reward shareholders. In other words, you'd like to see a value for cash from operations which is at least equal to and preferably greater than Net income.
Here are two examples of doing such a comparison. The first report is for LKQ, the second one is for CMG. They give you more insight as an investor as to why CMG commands a higher valuation than LKQ even though LKQ's sales and earnings growth lines are "Up, Straight and Parallel"
Laurie Frederiksen Invest with your friends! www.bivio.com
I looked at the Morningstar page that you can get to from Stock Study Plus and saw the new income, but not the Cash from Operations. Is it on the site where you have to pay?
From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Laurie Frederiksen Sent: Wednesday, October 21, 2015 1:21 PM To: The Club Cafe Subject: [club_cafe] Misrepresentation of Earnings
If you are predicting growth in stock prices using earnings reports, it is interesting to learn about the quality of the information provided in those reports.
The results are very interesting. Their sentiment is that as high as 20% of the reported earnings of publicly traded companies are misrepresented. The study gives many interesting reasons they feel this happens.
It is very readable. I found the table of "Earnings Misrepresentation Red Flags" on page 17 particularly interesting. The CFO's felt a correlation between earnings and operating cash flow was a very important indicator of the quality of reported earnings.
You might incorporate a quick check on this into your stock studies. It is easy to do. If you enter a Ticker on the Morningstar.com site, you are taken to a page of overview information. If you scroll down, you'll see a section labeled "Financials" which displays a few of the key financial results in a table.
If you compare the line labeled "Net Income" to the one labeled "Cash From Operations", you can see what the CFO's are referring to. Since it is cash flow that truly drives the value of a business, you want to see that the earnings number truly represents the type of Cash from operations that the company has to use to grow its business and reward shareholders. In other words, you'd like to see a value for cash from operations which is at least equal to and preferably greater than Net income.
Here are two examples of doing such a comparison. The first report is for LKQ, the second one is for CMG. They give you more insight as an investor as to why CMG commands a higher valuation than LKQ even though LKQ's sales and earnings growth lines are "Up, Straight and Parallel"
Laurie Frederiksen Invest with your friends! www.bivio.com
I believe that Cash from operations is called "Operating Cash Flow" on the page you're looking at.
From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Lucile Sorrells Sent: Sunday, October 25, 2015 11:57 AM To: club_cafe@bivio.com Subject: RE: [club_cafe] Misrepresentation of Earnings
I looked at the Morningstar page that you can get to from Stock Study Plus and saw the new income, but not the Cash from Operations. Is it on the site where you have to pay?
From:club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Laurie Frederiksen Sent: Wednesday, October 21, 2015 1:21 PM To: The Club Cafe Subject: [club_cafe] Misrepresentation of Earnings
If you are predicting growth in stock prices using earnings reports, it is interesting to learn about the quality of the information provided in those reports.
The results are very interesting. Their sentiment is that as high as 20% of the reported earnings of publicly traded companies are misrepresented. The study gives many interesting reasons they feel this happens.
It is very readable. I found the table of "Earnings Misrepresentation Red Flags" on page 17 particularly interesting. The CFO's felt a correlation between earnings and operating cash flow was a very important indicator of the quality of reported earnings.
You might incorporate a quick check on this into your stock studies. It is easy to do. If you enter a Ticker on the Morningstar.com site, you are taken to a page of overview information. If you scroll down, you'll see a section labeled "Financials" which displays a few of the key financial results in a table.
If you compare the line labeled "Net Income" to the one labeled "Cash From Operations", you can see what the CFO's are referring to. Since it is cash flow that truly drives the value of a business, you want to see that the earnings number truly represents the type of Cash from operations that the company has to use to grow its business and reward shareholders. In other words, you'd like to see a value for cash from operations which is at least equal to and preferably greater than Net income.
Here are two examples of doing such a comparison. The first report is for LKQ, the second one is for CMG. They give you more insight as an investor as to why CMG commands a higher valuation than LKQ even though LKQ's sales and earnings growth lines are "Up, Straight and Parallel"
Laurie Frederiksen Invest with your friends! www.bivio.com
Yes. Operating Cash Flow is the same thing as Cash from Operations. The information I referenced in the first email is found at the free morningstar.com site.
Or, if you go to the Cash Flow Statement that you can find in any Quarterly or Annual Financial report, you will find the same information in the first section that is called "Operating Activities". In that section, Net income at the top is reconciled to Operating Cash Flow. In the example below, operating cash flow is called "Cash Generated By Operating Activities".
Whatever the specific nomenclature, the purpose of that section is to reconcile net income from the Earnings report to actual cash from operations. The top and bottom amounts in that section are the ones I recommended comparing to get a feel for the quality of the earnings on the Earnings report.
Laurie Frederiksen Invest with your friends! www.bivio.com
From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Laurie Frederiksen Sent: Monday, October 26, 2015 8:29 AM To: The Club Cafe Subject: Re: [club_cafe] Misrepresentation of Earnings
Yes. Operating Cash Flow is the same thing as Cash from Operations. The information I referenced in the first email is found at the free morningstar.com site.
Or, if you go to the Cash Flow Statement that you can find in any Quarterly or Annual Financial report, you will find the same information in the first section that is called "Operating Activities". In that section, Net income at the top is reconciled to Operating Cash Flow. In the example below, operating cash flow is called "Cash Generated By Operating Activities".
Whatever the specific nomenclature, the purpose of that section is to reconcile net income from the Earnings report to actual cash from operations. The top and bottom amounts in that section are the ones I recommended comparing to get a feel for the quality of the earnings on the Earnings report.
Laurie Frederiksen Invest with your friends! www.bivio.com
