View
11
Download
3
Category
Preview:
DESCRIPTION
the Importance of Understanding the Difference Between Earnings, Operating Cash Flow and EBITDA
Citation preview
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 1/12
0
WEDNESD A Y , N OV EMBER 2 9 , 2 0 0 6
The Importance of Understanding the Difference betweenEarnings, Operating Cash Flow and EBITDA
An attractive aspect to using a dividend growth methodology in evaluating stocks is the dividend growthmethod enables an investor to gauge, indirectly, the cash flow of a company. Because cash is important toa company's survival, changes in a company's dividend practices may signal future cash flow issues for acompany.
Dividend growth stocks should not be looked at as simply investments that grow their dividend on anannual basis; but, the methodology leads to investment in companies that are growing their business asevidenced by growth in company cash flow. The other important aspect to successfully investing individend growth companies is to focus on the higher quality firms as rated by Standard and Poor's. S&P'sQuality Ranking measure attempts to capture the "quality" of earnings issue.
What is cash flow versus earnings? Earnings of a company are essentially a figure derived from accountingrules. The problem with "earnings" or "net income" from an accounting perspective, is the figure has verylittle to do with evaluating the cash flow stability of a company.
Cash flow comes in two forms: "operating" cash flow and simply cash flow. The latter is commonly referredto as EBITDA (earnings before interest, taxes, depreciation and amortization). The problem with theEBITDA calculation is the number is based largely on earnings. The website stockdiagnostics provides thefollowing interesting definition of EBITDA:
Microsoft® Translator
CON TR IB U TORS
David Templeton, CFA Mark Bennett, CFA
Nick Reilly Todd Poellein, CFA Matt Antenucci
Matt Woebkenberg
Contact us via email
LANGU AGE T RAN SLA T ION
Translate this page
Spanish
0 More Next Blog» Create Blog Sign In
The Blog of HORAN Capita l AdvisorsA D I S C I P L I N E D A P P R O A C H T O I N V E S T I N G
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 2/12
"(EBITDA) is calculated by adding "selected" expense items such as Interest expenses, Incometaxes, 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 cash flow per sharenumbers can be manufactured. When utilizing EBITDA an analyst or CFO is actually stating, "Thisis what our earnings would have been if it were not for interest, taxes, depreciation andamortization." 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'strue cash flow.... EBITDA is a manufactured "creative accounting" interpretation that presents acompany in the best possible light. EBITDA's original use was for lenders to determine creditviability. Today these interpretations are used primarily by companies and Wall Street analysts topromote stock to an unwary public. Commonly, when EBITDA or CFPS (cash flow per share) areused in this way they are deceptively called "cash flow" or some form thereof."
Operating cash flow is a measure that incorporates changes from the balance sheet and income statementthat have an impact on cash. The operating cash flow information is contained in SEC filings of companies.In the SEC financial filings for companies, firms include an income statement, balance sheet andstatement of cash flow. One of the most important financial documents in the filing is the statement of cashflow. This statement reconciles the cash balance on the balance sheet by incorporating changes incategories from the income statement and balance sheet accounts. For example, all else being equal, ifinventory increases, this reduces cash flow since cash was used to purchases the inventory. Of course, theinventory could be purchased on credit; then accounts payable would increase and this increases cashflow. The statement of cash flow contains three sections:
Cash provided by operating activities,Cash provided by investing activities, andCash provided by financing activities.
The key section to review on the cash flow statement is the one detailing operating cash flow.
Once the operating cash flow figure is analyzed, it should be converted to a per share number. This figurecan be evaluated across quarters to determine any negative or positive trends. Additionally, growth, orlack of growth in operating cash flow per share can be compared to companies within the same industry oracross industries. The last step in this analysis is to take the price of the stock divided by the operatingcash flow per share to come up with a price to operating cash flow figure. This number can be used toevaluate stocks in the same way one uses the P/E ratio.
Following is an example detailing the difference in a company's net income and operating cash flow:
(click on tables for larger image)
SU B SCR IB E IN A READ ER
Subscribe in a Reader
Follow @HORANCapitalAdv
SU B SCR IB E V IA EMA IL
Enter your email address:
Subscribe
Delivered by FeedBurner
MARKET N EWS
LATEST MARKET NEWS
MARKET UPDATE
HORAN Capital Advisors
Indonesian companies see 2016 oil and gas
lifting below govt's target
Bank of Italy official says most banks healthy
UPDATE 5'Star Wars' sales surge toward
opening weekend record
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 3/12
Jos. A. Bank (JOSB) Cash Flow Statement ($ in millions)
As one can see from the above charts, net income has grown nicely, but cash flow has actually declinedfrom year end '05 to '06. Note the large cash usage ($48.9 million) in 2006 attributable to an increase ininventory.
Get This Widget
For more news and uptodate market data, click
here.
Get a Share Quote
B LOG A RCHIV E
2015 ( 106 )
2014 ( 168 )
2013 ( 141 )
2012 ( 108 )
2011 ( 107 )
2010 ( 176 )
2009 ( 227 )
2008 ( 290 )
2007 ( 338 )
2006 ( 91 )
December ( 49 )
November ( 38 )
Eaton Vance's 8th AnnualInvestor Survey Recap
Bearish Sentiment Continues toMove Higher
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 4/12
Newer Post Older Post
POSTED BY DAVID TEMPLETON, CFA AT 3:57 PM
LABELS: DIVIDEND ANALYSIS
NO C OMMENTS :
Post a Comment
L INKS TO THI S P OS T
Create a Link
Home
Subscribe to: Post Comments ( Atom )
The Importance of Understandingthe Difference bet...
McCormick & Company IncreasesDividend 11%
Dividend Growth versus StockBuybacks
Dividend AristocratsPerformance in a Down Market
Determining the Valuation ofDividend Paying Stock...
Dividend Growth Stocks In ASlowing Economy
Dividend Paying StocksCash isKing
Weekend Reading
Indices One Can Use ToBenchmark Performance ofDi...
Bullish Sentiment Falls andBearish Sentiment Rise...
Real Estate Investment Trusts(REITs)
Becton Dickinson IncreasesDividend
Does The Inverted Yield CurvePredict A Recession?...
Asset Allocation: All BondPortfolio More Risky Th...
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 5/12
Dividend Increases
Notable Dividend Increases
Dividend Increases vs.StockBuybacks
What One Can Uncover ReadingSEC Filings
Sentiment Survey
Companies Yet to AnnounceDividend Action
Johnson Controls IncreasesDividend 18%
Recognizing a Trend and Signalsfor When It Might ...
Automatic Data ProcessingIncreases Dividend 24%
Stocks and ExDividend Dates
S&P's Dividend Aristocrats: PartII
S&P's Dividend Aristocrats: Part I
Market Technicals
Asset Allocation: Pros and Cons
January Effect Comes inDecember
Market Update from Novemeber6, 2006
Election Outcome Impact onEquity Market
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 6/12
Links to Sites/Articles onDividend Paying Stocks
Canadian Income TrustsCanadian GovernmentAnnounc...
Should an Investor Worry aboutthe 2010 Expiration...
October Performance of DividendPayers versus Non ...
Exchange Traded Funds with aDividend Focus
October ( 4 )
B LOG CA T EGOR IES
Alternatives
Bond Market
Commodities
Dividend Analysis
Dividend Return
Economy
Education
Financial Planning
General Market
International
Investments
Newsletter
Sentiment
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 7/12
Technicals
Valuation
Week Ahead
Book Review
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 8/12
USDCHF Looks For MoreStrength On Recovery
Article By:FXTechstrate…Friday, December 18,2015 11:37 PM ESTIn this article: FXF
Remainder Of 2015 IsGloriously Quiet
Article By:Tim KnightFriday, December 18,2015 8:58 PM EST
The Past As A Guide To TheFuture
Article By:Tom BeeversFriday, December 18,2015 5:15 PM EST
EC Three Things I Think I
Am Thinking About – MartinShkreli Edition
Article By:Cullen RocheFriday, December 18,2015 5:00 PM ESTIn this article: KBIO
Mission AccomplishedArticle By:Peter SchiffFriday, December 18,
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 9/12
B LOGS WE READ
Abnormal Returns
Calafia Beach Pundit
Contrarian Edge
Dash of Insight
Dividends4Life
Dividend Growth Investor
Dividend Investor.com
Econbrowser
footnoted.org
McVerry Report
Oilprice.com
Real Clear Markets
Political Calculations
10Q Detective
The Big Picture
The Capital Spectator
The DivNet
Friday, December 18,2015 4:58 PM EST
SP 500 And NDX FuturesDaily Charts Out On TheLows For Option Expiry
Article By:Jesse's Cafe …Friday, December 18,2015 4:48 PM EST
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 10/12
The Dividend Guy Blog
The Kirk Report
The Short Side of Long
20sMoney
WSJ's MarketBeat Blog
Wall Street Currents
World Beta
RESOURCE L IN KS
American Association of IndividualInvestors
Economic Cycle Research Institute
Mergent Dividend Achievers Data
Stockcharts.com
Yahoo Finance
NETWORKS A NDA F F I L IA T ION S
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 11/12
Dividend Growth StocksDividend Growth InvestorFeatured Associates:The Market Capitalist
FI FighterHarvesting DividendsAll About InterestDividend MantraThe Dividend Pig
12/19/2015 The Blog of HORAN Capital Advisors: The Importance of Understanding the Difference between Earnings, Operating Cash Flow and EBITDA
http://disciplinedinvesting.blogspot.my/2006/11/importanceofunderstandingdifference.html 12/12
THE CONTENT OF THIS SITE IS FOR INFORMATIONAL PURPOSES ONLY. THE
INFORMATION AND CONTENT SHOULD NOT BE CONSTRUED AS A RECOMMENDATIONTO INVEST OR TRADE IN ANY TYPE OF SECURITY. NEITHER THE INFORMATION, NORANY OPINION EXPRESSED, CONSTITUTES A SOLICITATION TO THE PURCHASE ORTHE SALE OF ANY SECURITY OR INVESTMENT OF ANY KIND. THE BLOG OF HORAN
CAPITAL ADVISORS AND HORAN CAPITAL ADVISORS (HCA) DISCLAIMRESPONSIBILITY FOR UPDATING INFORMATION ON THIS SITE. IN ADDITION, THEBLOG OF HORAN CAPITAL ADVISORS AND HCA DISCLAIM ANY RESPONSIBILITY FOR
THIRDPARTY CONTENT, INCLUDING INFORMATION ACCESSED THROUGHHYPERLINKS. ALL INDIVIDUALS ARE ADVISED TO CONDUCT THEIR OWNINDEPENDENT RESEARCH BEFORE MAKING ANY INVESTMENT DECISION.
Recommended