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Charles J. Corrado_Fundamentals of Investments - Chapter 7

CHAPTER 7 Earnings and Cash Flow Analysis Cash flow is a company’s lifeblood, and for a healthy company the primary source of cash flow is earnings. Little wonder that security analysts are obsessed with both. Their goal is to predict future earnings and cash flow. | CHAPTER 7 Earnings and Cash Flow Analysis Cash flow is a company s lifeblood and for a healthy company the primary source of cash flow is earnings. Little wonder that security analysts are obsessed with both. Their goal is to predict future earnings and cash flow. An analyst who predicts well has a head start in knowing which stocks will go up and which stocks will go down. In the previous chapter we examined some important concepts of stock analysis and valuation. Here we probe deeper into the topic of common stock valuation through an analysis of earnings and cash flow. In particular we focus on earnings and cash flow forecasting. This chapter will acquaint you with financial accounting concepts necessary to understand basic financial statements and perform earnings and cash flow analysis using these financial statements. You may not become an expert analyst yet - this requires experience. But you will have a grasp of the fundamentals which is a good start. Unfortunately most investors have difficulty reading financial statements and instead rely on various secondary sources of financial information. Of course this is good for those involved with publishing secondary financial information. Bear in mind however that no one is paid well just for reading such sources of financial information. By reading this chapter you take an important step toward becoming financial-statement literate and an extra course in financial accounting is also helpful. But ultimately you learn to read financial statements by reading financial statements Like a good game of golf or tennis financial-statement reading skills require practice. If you have an 2 Chapter 7 aptitude for it financial statement analysis is a skill worth mastering. Good analysts are paid well but good analysis is expected in return. Maybe you too can become one of the few the proud - a financial analyst. 7.1 Sources of Financial Information Good financial analysis begins with good financial information. An excellent