Accruals are the gap between what a company reports as earnings and what it actually collects in cash. Under accrual accounting, companies record revenue when earned and expenses when incurred, regardless of when cash changes hands. If a company reports $100M in net income but only $60M in...
Share-based compensation has become an increasingly prominent expense for public companies, particularly in the technology sector. Under GAAP accounting rules, share-based compensation must be recorded as an expense. The problem is that many companies report non-GAAP "adjusted" earnings figures that strip out this expense entirely. Terry Smith, Chief...
Look at this chart of Adobe’s (ADBE) EPS and y/y growth over the last 10 years: While growth hasn’t been perfect, EPS is trending in the right direction (CAGR of 29.8%). Most investors would stop here, satisfied with what they see. The reality, however, is that many companies...
In "The Five Keys to Value Investing" (2003), J. Dennis Jean-Jacques presents three approaches for evaluating businesses: Using all three approaches helps spot red flags that single metrics miss, like companies with high returns but weak cash generation, or strong margins hiding operational inefficiencies. Vertical Assessment Approach The...
In a Morgan Stanley 2022 paper titled "Intangibles and Earnings," Michael Mauboussin explains a major problem with today's financial statements: Accounting rules treat physical and intangible investments differently, despite their similar economic purpose. Mauboussin's solution is to capitalize (i.e., record as assets rather than expenses) intangible investments and...
This article will explain why Earnings Per Share (EPS) is flawed in stock analysis, particularly when representing a company's profitability, financial health, or value. While EPS is a frequently cited figure in stock valuation and undoubtedly one of the most discussed financial metrics in the stock realm, its...
This article will explain how the three financial statements are linked. This will be accomplished by providing an overview of the three financial statements and then navigating through an integrated financial statement model using a simple business model. The three financial statements are the cash flow statement, the...
The cash flow statement tracks how money moves through a business, showing exactly where cash comes from and where it goes. While the income statement tells you if a company is profitable on paper, the cash flow statement reveals whether a company is generating the actual cash needed...
The balance sheet provides a snapshot of a company's financial position at a specific point in time. While the income statement tells you how profitable a company is, the balance sheet reveals what the company owns, what it owes, and what's left for shareholders. Investors should learn to...