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URL:  https://boards.fool.com/i-think-i-can-help-here-when-you-buy-a-share-of-20617059.aspx

Subject:  Re: Enterprise value Date:  4/10/2004  4:29 AM
Author:  Byrne2000 Number:  1343 of 2244


I think I can help here.

When you buy a share of a company you are buying a share in the ownership of a company's future cash flows. The earnings of a company doesn't necessarily represent cash coming into the company. Earnings are calculated by subtracting Expenses from Revenues, and do not include cash being spent on capital expenditures, like buying stores and equipment, or changes in net working capital. Free Cash Flow's does take this into account.

Now here is the tricking part. Your investment purchased a claim to these future cash flows of the company, but you are entitled to this claim AFTER the debt holders get there share. They have the first claim and you have the last claim. Enterprise Value takes this into consideration (Market Cap, your money, + Debt, their money, - Cash). So while a company can have positive earnings, it can actually be spending more cash than it is generating in order to achieve these earnings (creating negative cash flows).

Without cash the debt will never be paid off, without cash you can never receive a dividend. The debt is eventually paid off with CASH NOT EARNINGS, and your future dividends will be paid in CASH NOT EARNINGS. As any fool would say “CASH IS KING”. Earnings tell only part of the story. I hope I was able to explain this well.

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