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grants the most options.
Telecommunications
• High fixed investment (capital intensive).
• Changing regulatory environment.
• Long-term assets and depreciation.
• Long-term debt (for instance, many companies are
highly leveraged).
Cash Flows Help to Determine the Quality of Earnings
While some academic theories say that cash flows set stock prices, and some investors appear to be shifting their attention toward cash flows, can anyone deny that earnings (and EPS) move stocks? Some have cleverly resolved the cash flow- versus-earnings debate with the following argument: in the short run, earnings move stocks because they modify expectations about the long-term cash flows. Nevertheless, as long as other investors buy and sell stocks based on earnings, you should care about earnings. To put it another way, even if they are not a fundamental factor that determines the intrinsic value of a stock, earnings matter as a behavioral or phenomenal factor in impacting supply and demand.
Thoughout this tutorial, we explore several examples of how current cash flows can say something about future earnings. These examples include the following:
Cash Flows That May Impact Future Earnings
Why the Cash Flows May Be Predictive
Changes in operating accounts, which are found in the statement of cash flows, sometimes hint at future operational deterioration:
• Increase in inventory as percentage of COGS/sales (or decrease in inventory turnover).
• Unless company is stocking up ahead of anticipated demand, the increase in inventory could indicate a slackening demand.
• Increase in receivables as percentage of sales (or decrease in receivables turnover).
• Customers may be taking longer to pay; there may be an increase in collection problems.
• Decrease in payables as percentage of COGS/sales (or decrease in payables turnover).
• Company may be losing leverage with vendors.
If "cash collected from customers" grows less than revenues, there may be future revenue
Reported revenue may be getting a temporary (current) boost by end-of-
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