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|Subject: Re: Understandiing Book Value Per Share||Date: 8/18/2011 10:12 PM|
|Author: JaredCarr||Number: 2170 of 2229|
If the company does one big acquisition and hasn't done any other in its 10 year history, you might not want to penalize them for the amount they spent on that acquisition. If they do acquisitions every year, like MMM or CSCO, you'd definitely want to include that.
I'm having a little trouble understanding this...
So for companies that makes many acquisitions, we should not classify these costs as "one-time items" (and thus, we will not reimburse them for making these purchases, since they are recurring).
And for companies that seldom make acquisitions, we should add back in the amount of cash they spent associated with that purchase, right?
If this is true, then consider the structural free cash flow equation:
Structural free cash flow = Net Income + Depreciation/Amortization ± One-Time Items - Capital Expenditures
I'm assuming that the goal of structural free cash flow is to adjust the net income value to more appropriately measure the profitability of a company.
In the financial statements of Eagle Rock Energy Partners L.P. (NASD: EROC), the company claims to have made a $220m purchase of another company during the first two quarters of 2011. This is stated under the "CASH FLOWS FROM INVESTING ACTIVITIES:", second line:
However, this $220m purchase was not included in the calculations for net income on the income statement anyway (had this been included in the net income calculation, they would have reported drastically reduced earnings). So this $220m purchase was never subtracted from the net income calculation on the income statement in the first place.
However, the structural free cash flow equation calls for us to add in the $220m from Net Income (as a one-time item). So my question is, if this purchase was never subtracted from net income on the income statement, why do we re-add it in this formula?
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