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.
How can Cash Flow be less than Earnings
Re: How can Cash Flow be less than Earnings
Google the phrase 'accrual accounting'
Show me the incentive and I will show you the outcome
--Charlie Munger
--Charlie Munger
Re: How can Cash Flow be less than Earnings
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.
Added: Here is a presentation on the same topic.
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Re: How can Cash Flow be less than Earnings
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.
That is an example where the income statement will tell a much rosier picture then their cash flow statement.
Re: How can Cash Flow be less than Earnings
Earnings are a figment of your CFOs imagination. Free cash flow is hard to fudge.
For the fun of it...Keith
Re: How can Cash Flow be less than Earnings
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.