Depreciation - Invest what one knows

**jianyunli** Tue Jan 03, 2006 10:17 am

Depreciation - Invest what one knows
Blast

is the depreciation in the income statment (revenue-COG-SGA-depreciation-interests-taxes)

the same as in the cash flow statement, adjusted net income to cash flow from operations
(net income+depreciation+-working capital changes)

when I read some companie's reports, they are not the same, can you give me some explanation here.

thanks

**blast_investor** Tue Jan 03, 2006 10:42 am

In theory, it should be same.

But companies may treat them differently.

Also, depreciation may mean depreciation + Amortization + depletion in one statement, but modified meaning in another statement.

You would need to check annual report to find out the answer.

**jianyunli** Tue Jan 03, 2006 10:56 am

cash flow vs net income
blast

generally I get a feeling from reading your articles that cash flow is a better performance indicator than net income because company's aggressive revenue recognition/expense unrecognition, but still sometimes like when company write a big asset off from their book, this will be recorded in the income statement but not reflected in the cash flow statement, because it's a non-cash item. Am I right on this?

thanks

**jianyunli** Tue Jan 03, 2006 11:03 am

few more questions
1. Sales are booked before payments received.

How can you usually detect such things

2. How do you familiarize a company's major business? I mean when I read some companys' profile or even go to their website(especially some technology companies), their products are really something that I don't understand like nanotechnology, I just don't understand who are buying their products and why are buying? Do you have some input on this?

thanks for so many questions

Happy new year

**blast_investor** Tue Jan 03, 2006 12:48 pm

Re: cash flow vs net income
You are right. if a company wants to cheap, most likely Income statement is first place to "cheat" investors.

Therefore, income statement or reported "earning per share" is least useful information for investors in such case.

Cash flow is better and more reliable metrics to understand what is going on.

jianyunli wrote: blast

generally I get a feeling from reading your articles that cash flow is a better performance indicator than net income because company's aggressive revenue recognition/expense unrecognition, but still sometimes like when company write a big asset off from their book, this will be recorded in the income statement but not reflected in the cash flow statement, because it's a non-cash item. Am I right on this?

thanks

**blast_investor** Tue Jan 03, 2006 12:56 pm

Re: few more questions
jianyunli wrote: 1. Sales are booked before payments received.

How can you usually detect such things

2. How do you familiarize a company's major business? I mean when I read some companys' profile or even go to their website(especially some technology companies), their products are really something that I don't understand like nanotechnology, I just don't understand who are buying their products and why are buying? Do you have some input on this?

thanks for so many questions

Happy new year

1. Sales are booked before payments received., that is true for most companies. This style of accounting is actually correct according to US law. nothing wrong there.

But the problem with investors is this question: how much of payment can company receive after sale? If clients do not pay, then the sales are not really meaningful, it does not matter how large the sale amount or revenue amount is if there is no cash to be received.

This question can be answered in cash flow. When company receives cash, cash flows in. Pretty simple concept.

2. the best place is 10K annual report. That is the most important source of information. if I do not understand company's product, I would not invest into that stock. That is my take. Just focus on what you understand. There are 7000 stocks in US market, there is no point of trying to understand every stock there. It is almost impossible to understand so many companies deep enough for value investing purposes.

**yhan** Wed Jan 04, 2006 12:46 am

Blast makes good points. In security analysis, Graham illustrated different accounting methods used for different industries, and also there are issues with FIFO and LIFO, amorization, and reserves. There are a lot of ways to manipulate accouting methods. Therefore, you have to understand the industry and evaluate stocks using the same method. This is not going to be easy.

The rule of "doing things that you know" applys here too.