Why SAP's Earnings Are Outstanding

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. 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.

Calling all cash flows
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. That's what we do with this series. Today, we're checking in on SAP (NYSE: SAP  ) , whose recent revenue and earnings are plotted below.

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Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, SAP generated $4,728.1 million in FCF while it booked net income of $2,590.9 million. That means it turned 25.7% of its revenue into FCF. That sounds pretty impressive. 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.

Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. TTM = trailing 12 months.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. 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. 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).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. 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. 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. 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.

So how does the cash flow at SAP look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

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Source: Capital IQ, a division of Standard & Poor's. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

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. 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. 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.

With questionable cash flows actually reducing operating cash flow a bit, SAP's cash flows look clean. Overall, the biggest drag on FCF came from capital expenditures, which consumed 11.1% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

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Source: http://feeds.fool.com/~r/usmf/foolwatch/~3/ILXm2LcrMuU/why-saps-earnings-are-outstanding.aspx

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Appropriate Debt Reduction Programs According To Your Individual Situation And Needs

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Thanks to wrong financial management and planning, a lot of people have got into the debt trap. The main problem that has created this havoc is that these people have started spending, assuming that money would come to them or they would be able to earn. When the money has not come through or if there has been a delay, they have been forced to borrow to repay the amount they have already spent.

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Debt Consolidation Loans: Reduce Your Debt Now With a Debt Consolidation Loan!

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Have you already started looking up debt consolidation loans to help fix some of your past credit and debt issues? While consolidating all of your debts can be beneficial to some there are still a lot of questions that go along with the process.

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Forex Day Trading - Do You Have What It Takes To Involve In Fx Day Trading?

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Today people all over the world are looking for ways that they can earn money from the comfort of their own homes. While there are many ways to earn money from home, a lot of people turn to Forex day trading.

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Police Academy Preparation Guide ? Get A Police Academy Prep Book To Prepare

If you have chosen law enforcement as your career, you’ve chosen one of the most difficult training programs on the market. But, what if there was a approach to make it simpler? The curriculum at the police academies will put your brain, brawn and emotions to the test. You will want to be prepared for [...]

Source: http://www.legaldebthelponline.com/2011/06/21/police-academy-preparation-guide-get-a-police-academy-prep-book-to-prepare/

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RICHARD KOO: Get Ready For Two More Years Of Housing Market Nightmare


The U.S. should expect home prices to continue to decline through 2013, and that will have a devastating effect on the balance sheets of consumers, according to Nomura's Richard Koo.

Koo highlights that the U.S. real estate market is still someways away from its pre-bubble trend.

From Richard Koo:

The recent declines in house prices imply significant progress in restoring housing values to the pre-bubble trend line.

If the downtrend that began in 2010 persists, housing prices will fall back to the pre-1998 trendline in the first half of 2013 (Figure 2).

That would mean the loss of an additional $2trn in household wealth and a return of house values to 2002 levels.

It would also mean a further decline in the ratio of household housing assets to debt to 1.48x, from 1.62x at present, and that could easily spark another round of household deleveraging.

That further loss in wealth could be the trigger for another round of U.S. deleveraging, and stymie the nascent consumer recovery.

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Don't miss: Richard Koo explains why we're in a balance sheet recession >

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You May Standard bank In It.

Most U.S. citizens attractive, get online to, or boost to their bank several times each week and hand over their hard earned dollars. Why do they do it? How many other strangers would they trust to carry their savings, and return your money and additional funds back to them at any time in time? What [...]

Source: http://www.legaldebthelponline.com/2011/06/21/you-may-standard-bank-in-it/

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Bad Credit Refinance: Is It a Good Option?

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Millions of Americans experience problems with financing debts on mortgages, credit cards and paying monthly bills on time. It seems that we are pulling out of the global recession, but you may still feel you need to refinance your mortgage because of outstanding debts.

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