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I'll tack on to Mike's comment...

I work primarily out of the Statement of Cash Flows (SCF), as cash accounting is a much more accurate method of tracking performance than modified accrual based accounting, which tends to be subject to manipulation. As Mike points out, operational cash flows can swing widely quarter to quarter. Think of your own household...4th quarter is usually your greatest cash-outflow quarter due to the holidays. Businesses, depending on their industry, may also have season variations as well as periodic large changes in working capital accounts. So I use rolling 4-Quarters to smooth out the fluctuations, and then look at the multi-quarter trending of key CF ratios.

I use average basic shares rather than fully diluted shares when doing trending on a per-share basis. I used to use fully diluted just to be conservative in my calcs, until a CFA analyst friend of mine asked me why I was using that instead of average basic shares. Fully diluted includes any possible stock-instrument that can be converted to common shares, to include employee options, unvested RSUs, convertible debt/preferreds and warrants. But most of these will not be converted to company stock until they either vest or the price reaches a conversion price.

Rather than picking out this or that adjustment to earnings, I simply use the Consolidated Funds from Operations, CFFO, as reported. This is the actual cash from operations management had available to them at the end of the period. I then reduce this by any cash distributions made to non-controlling interests (rare) and any dividends paid to preferred shareholders (if any). The Net CFFO remaining is what management has available to them to first pay the common dividend and after that, to put towards investing activities.

For dividend paying stocks with long dividend histories, the best way I've found of valuing the share price...something I normally don't do....is to look at the yield spread with the 10 Year Treasury Bond. The greater the spread, the lower the valuation.

BruceM
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