How can Cash Flow be less than Earnings

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Mouly
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How can Cash Flow be less than Earnings

Post by Mouly » 17 Oct 2017 16:34

Maybe I'm not understanding the definitions, or I'm simplifying too much.... but how can Cash Flow be less than Earnings.

I thought Cash Flow was roughly Earnings plus depreciation. So for example I'm seeing that JNJ in 2016 had Earnings Per Share of $6.04 and Cash Flow Per Share of $5.93 So does that mean JNJ had negative depreciation? What does that mean? Something like a brand name has become more valuable? I guess I'm used to depreciation on physical assets that decline in value.

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FinEcon
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Re: How can Cash Flow be less than Earnings

Post by FinEcon » 17 Oct 2017 17:49

Google the phrase 'accrual accounting'
What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact

-- Warren Buffett

DanH
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Re: How can Cash Flow be less than Earnings

Post by DanH » 13 Nov 2017 20:25

The classic case study when I was in university was W.T. Grant Company. It's an extreme but interesting case study in earnings quality and the importance of careful cash flow analysis.

Added: Here is a presentation on the same topic.

OptsyEagle
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Re: How can Cash Flow be less than Earnings

Post by OptsyEagle » 14 Nov 2017 07:52

In some of the final Nortel years, being desperate for sales, NT would sell equipment to some dot.com companies where they actually finance the stuff for them. So the dot.com is buying the equipment, NT is booking the sale and consequent net income, but they are not receiving the cash...and in some cases, probably never will.

That is an example where the income statement will tell a much rosier picture then their cash flow statement.

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kcowan
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Re: How can Cash Flow be less than Earnings

Post by kcowan » 14 Nov 2017 08:28

Earnings are a figment of your CFOs imagination. Free cash flow is hard to fudge.
For the fun of it...Keith

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patriot1
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Re: How can Cash Flow be less than Earnings

Post by patriot1 » 14 Nov 2017 20:59

If you're using your earnings to pay down debt, or to purchase capital stock, your cash flow can be well below earnings. Neither is an expense.

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