But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.
That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. Data is current as of last fully reported fiscal quarter. Source: Capital IQ, a division of Standard & Poor's. So how does the cash flow at Encore Energy Partners look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares. The same goes for decreasing accounts receivable this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).įor instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable.
That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. Unfortunately, the cash flow statement isn't immune from nonsense, either. Since a single-company snapshot doesn’t offer much context, it always pays to compare that figure to sector and industry peers and competitors, to see how your business stacks up. That means it turned 62.2% of its revenue into FCF. Over the past 12 months, Encore Energy Partners generated $114.2 million cash while it booked net income of $32.1 million. That brings us to Encore Energy Partners (NYSE: ENP), whose recent revenue and earnings are plotted below.
#Encore energy partners stock free
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.Įarnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output.
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