Make Free Cashflow Reporting Mandatory
Investors following earnings season can be forgiven for being bewildered by the numbers companies throw at them. For the uninitiated, reading the Profit & Loss Accounts, the Cashflow Statement and the Balance Sheet is quite a task. The irony is that even accountants admit much of it is based on assumptions and opinions. But while all companies provide a cashflow statement, few companies actually report Free Cashflow. We think it should be mandatory.
Free cashflow (FCF) is the ultimate measure of a company's financial health because it measures how much cash the business is actually generating, after staff and all their bills have been paid and money has been reinvested into the business, in the form of new equipment, and so on. It is the money the company does not know what to do with. It shows how much money the company could potentially pay out to shareholders.
Unfortunately, not many companies report it. StarHub is one of the few. It reported earnings last night, and the number appeared on page 2 of their earnings statement. While investors can work the figure out themselves, it would be better hearing it from the companies themselves.
That's not to dismiss profit altogether. For example, it is still interesting to know that, for example, the revaluation of a property boosted profit. Presumably, this property could be borrowed against, or sold. These would bring physical cash into the company. But the problem is there are many measures of profit (Gross Profit, Profit Before/After Tax, Abnormals, and so on). Which one should investors look at? By contrast, there is only one Free Cashflow number. It cannot be massaged by property revaluations and other abnormal items.
I can understand that some companies – especially those which don't generate any free cashflow – would be reluctant. But hiding poor cash generating ability behind great paper profits doesn't really address the spirit of continuous disclosure obligations, even though it meets the letter of it. Making Free Cashflow part of the mandatory continuous disclosure obligations would ensure that investors understand straight away whether a company is worth investing in or not.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
ArchivesFree cashflow (FCF) is the ultimate measure of a company's financial health because it measures how much cash the business is actually generating, after staff and all their bills have been paid and money has been reinvested into the business, in the form of new equipment, and so on. It is the money the company does not know what to do with. It shows how much money the company could potentially pay out to shareholders.
Unfortunately, not many companies report it. StarHub is one of the few. It reported earnings last night, and the number appeared on page 2 of their earnings statement. While investors can work the figure out themselves, it would be better hearing it from the companies themselves.
That's not to dismiss profit altogether. For example, it is still interesting to know that, for example, the revaluation of a property boosted profit. Presumably, this property could be borrowed against, or sold. These would bring physical cash into the company. But the problem is there are many measures of profit (Gross Profit, Profit Before/After Tax, Abnormals, and so on). Which one should investors look at? By contrast, there is only one Free Cashflow number. It cannot be massaged by property revaluations and other abnormal items.
I can understand that some companies – especially those which don't generate any free cashflow – would be reluctant. But hiding poor cash generating ability behind great paper profits doesn't really address the spirit of continuous disclosure obligations, even though it meets the letter of it. Making Free Cashflow part of the mandatory continuous disclosure obligations would ensure that investors understand straight away whether a company is worth investing in or not.
Mark Laudi
To comment on this blog, visit the Investor Central Blog.
Labels: Earnings, Free cashflow, net profit, StarHub
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