Importance Of Earnings Quality

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Earnings Quality
HOW TO ASSESS THE QUALITY OF EARNINGS RATHER THAN
QUANTITY?

Overview


Janet Blair Portfolio manager for a mutual fund



D.C Burke chairman on NEC



NEC Core Business is Manufacture and sales of equipment and appliances for the generation, transmission and utilization and control of electricity.

NEC –Ten years summary

NEC Financial Data

For Example:
Pharmaceutical Company

R&D

R&D
Sister

thus the parent company's biggest expense is now in the income earned column
Small sister

8 ways to measure quality.
1.

Free cash flow

2.

Free cash flow / Stock Price

3.

Profit Margins

4.

Backlog

5.

Receivables

6.

R&D

7.

Marketing

8.

Pension plans

Due Diligence.


Roll up your sleeves and scouring the sheets until you are sure that those main figures are real

Reading the footnotes will provide you with the clues you'll need to track down the truth.

Future Prospects of NEC
Accumulate

Reduce

Factors used for my
Assessment
Free Cash Flow
Liquidity and Solvency
Accounting Gimmicks
Contingencies

Free Cash Flow


What is Free Cash Flow?



How it works?



Why it matters?



Video

Free Cash Flow


Definition:

FCF represent the cash that a company is able to generate after laying out the money required to maintain or expand its asset base.


Formula:

FCF = Cash Flow From Operating – Capital Expenditure


Calculation:

Y2002: $ 35,526,000 – 202,414,000 = -166,888,000
Y2001: $ 340,685,000 - 224,721,000 = 115,964,000

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