Earnings, Dividends, and Cash Flow

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Posted by Bob on May 07, 19100 at 05:24:20:

The intrinsic value of an asset is what you can get out of it, usually cash flow over a number of years. Cash flow is either dividends or free cash flow to the common stock holders equity account (FCFE).

Not all companies have begun paying dividends. FCFE reflects what a company could pay out as dividends with no plowback for maintaining position and growth. FCFE is the alternative metric to estimate intrinsic value. Cash flow, earnings, and other models can be reconciled -- see the pages at Global Value Investing (Site Map).

All earnings become either payout or plowback. The portion plowed back adds value and is realized on sale.

Working capital equals accounts receivable minus accounts payable. To improve liquidity and maintain solvency, working capital should be positive, especially at the end of fiscal reporting periods. A cash shortage can impair a company's operating flexibiilty.

Graham's rules of thumb are not classic in the sense of timelessness. HIs rules changed in each new edition of his so-called classic 1934 edition of Security Analysis. He changed them in order to fit the current fashion for "growth" in the stock market. A cheap stock is not a bargain unless there is also an undervalued asset or some catalyst for improvement.

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