UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev | Next
Author: JaredCarr Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2209  
Subject: Re: Understandiing Book Value Per Share Date: 8/18/2011 10:12 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
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:

http://sec.gov/Archives/edgar/data/1364541/00013645411100008...

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?
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (15) | Ignore Thread Prev | Next

Announcements

Foolanthropy 2014!
By working with young, first-time moms, Nurse-Family Partnership is able to truly change lives – for generations to come.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Macro Economics

Economic Implications of Cuba
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement