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I wish I had the time to look over your spreadsheet, but I do not. I can barely keep up with my portfolio.

But if you have a specific question about a calculation, I will try to answer it satisfactorily. Jim Gillies and KitKat have done excellent work on operating leases in the past; you may want to read their old posts for additional insights.

Also, Prof. Damodaran has covered operating leases. A GOOG search will lead you to his website.

Last, if you scroll back a year there is a link to an Earnings Power Chart spreadsheet that a reader kindly shared with everyone else.

For now, let's assume your calculations are correct. So now you want to figure out what factors are driving defensive and enterprising losses. If you are able, line up the three income statements side-by-side and move from topline revenue to bottom line earnings. This is the fun part of securities analysis.

For instance, I am finishing work on Perini (PCR), an engineering and construction outfit that looks cheap due to fears Las Vegas is overbuilt. (Perini rose from near-penury in 1997 to build several marquee casinos/hotels there, including the pyramid-shaped Luxor and the replica Eiffel Tower.)

Anyway, Perini's defensive profits in the last several years are running ahead of GAAP profits, while enterprising profits are lagging. My spreadsheet is set-up so I can look at all three income statements and quickly zero in on what is causing these discrepancies.

In PCR's case, defensive profits are robust because the company enjoys a negative investment in working capital. This is a source of cash, which boosts defensive profits (free cash flow) but is excluded, for better or worse, from the GAAP P&L. When valuing PCR, an important question to think about is whether it will continue to enjoy a negative investment in WC.

As for our more forward-thinking income statement, enterprising profits lag GAAP because even though PCR has $425 million of net cash, I assume operating cash is $800 million. (Excess cash is cash + securities over 20% of the sum of operating expenses plus investment in fixed and WC.) So unfortunately for PCR, even though the company has a liquid balance sheet, I assume all this cash is as necessary as trucks and equipment yards. If the company was less-capital intensive, I would treat its cash as a non-operating item, which would decrease enterprising capital and increase enterprising profits.

Hope these ideas give you food for thought. The more companies you study, the easier it gets.


Hewitt
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