From the heap of the disgraced reporting practices one yardstick stood out as the least pliable tool for manipulation. It is the confirmation of the reliability of the age-old yardstick namely cash flow analysis and cash from operations.
In
such a situation the persistent question that crops up
again is that is it feasible to identify which
companies currently show the signals of deteriorating
early on? There's no foolproof standard for tracking
how revenue growth is consistently translating into
earnings. But one yardstick clearly comes closest:
cash flow from operations, that is, the amount of
money that the ongoing business throws off. Why?
Perhaps that measure is least subject to accounting
distortions. Evidence of its validity: the fact that
most companies' cash flows weren't subject to downward
revision. The stock market has not in the past put
much emphasis on judging companies by their cash
generating ability. Analysts have traditionally
assessed a company's performance in terms of a handful
of yardsticks, with most emphasis put on the
price/earnings per share ratio. But these measures
have become less reliable in recent years, as
companies have become more creative in their
accounting practices. The collapse of a number of
quoted companies, which from the balance sheets
appeared healthy, has added to the concern.
All
things being equal, cash flow presents a clearer
picture of a company's actual performance, simply
because it reflects money received and paid out during
a given interval, whereas earnings are based on all
types of estimates and assumptions. But in most
industries, including financial services, technology,
and healthcare, most companies are still valued on the
basis of traditional price/earnings multiples. In
fact, less than a third of the analysts' reports for
companies in these industries include cash-earnings
multiples. |
