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Learning to Invest / Terms, Definitions, & Jargon
|Subject: Re: Understandiing Book Value Per Share||Date: 8/3/2011 10:23 AM|
|Author: TMFSandman||Number: 2163 of 2201|
19? I never would have guessed. Awesome that you are starting this early on learning how to invest. Based on your writing I would have guessed someone much older. I'm exactly twice your age. :)
I don't know that much about the shipping industry. One guy who does though and follows several companies in that space is Hohum777. He posts a lot of his thoughts on shipping companies in the Value Hounds Board under the Investment Analysis Clubs tab. I'd post your specific questions about Diana there. Here's an example post from Hohum777:
Likewise, I have no opinion on NBG. I've never studied it. I wish them luck! :)
The cash flow statement is very handy since it shows the actual amount of cash flowing into and out of the company for the time period. It strips out all the accrual accounting stuff that smooths out ups and downs in the income statement. For example, a company could show record net income in the income statement but when you look at the cash flow statement you might see that most of that income was a build in accounts receivable and not actual cash paid for the product. That's not necessarily bad over one reporting period but you want to make sure the company gets paid at some point. Likewise, you can see if the company is building inventory or drawing down inventory, and what accounts payable is up to. Another great thing to check is to see if operating cash flow is more than, equal to, or less than net income. Operating cash flow adds back in the non-cash expenses like depreciation and amortization and stock-based compensation, and takes out the non-cash income like builds in accounts receivable. And all this stuff is just in the operating cash flow section!
In the investing cash flows section you can see how much the company spends on capex and acquisitions. This is really important since the money left over after you subtract capex from operating cash flow is the amount of cash left over after all expenses (both operating expenses and expenses to grow and maintain the business) that the company could conceivably distribute to shareholders. This is the "free cash flow" from the business, a term you'll hear a lot as you learn about investing. If you ran a small business this would be the money you had left over after you paid for all the operating expenses (ex. rent, salaries, taxes) AND after you paid for the expenses to grow and maintain your business (ex. opening a new store, maintaining the current store)
In the financing cash flows you can see how much new debt the company took on, what old debt they may have paid off, and how much money the company spent on share buybacks and dividends.
In sum, the cash flow statement is a really useful tool. The only thing to keep in mind is that since it does show the actual cash in and out of a business for a period and doesn't smooth expenses and income out, it can be very lumpy. You wouldn't want to base an opinion on a company based on just one cash flow statement. For example, say a company made a large acquisition or capital expenditure in the period you are studying. After you subtract capex and acquisition expense from operating cash flow you might very well end up with negative free cash flow. It could be negative even while net income is positive since capex is spread out over the useful life of the acquired asset as depreciation in the income statement. That's not necessarily bad and actually frequently happens, but free cash flow has to be positive at some point, otherwise the investment is not a good one. In the end, it's all about free cash flow and how much the company can generate for you. In the near term free cash flow will go up and down, but the key to valuation is to get a crude estimate together of approximately how much free cash flow the company could pull in over its life. That's the money, were you to own the entire company, that would end up in your pocket.
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