Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks (Wiley Finance) PDF
Preview Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks (Wiley Finance)
P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD viii P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD Free Cash Flow i P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD Also by George C. Christy FreeCashFlow:ATwo-HourPrimerforManagementandtheBoard ii P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD Founded in 1807, John Wiley & Sons is the oldest independent publish- ing company in the United States. With offices in North America, Europe, AustraliaandAsia,Wileyisgloballycommittedtodevelopingandmarketing print and electronic products and services for our customers’ professional andpersonalknowledgeandunderstanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors andtheirfinancialadvisors.Booktopicsrangefromportfoliomanagement to e-commerce, risk management, financial engineering, valuation and fi- nancialinstrumentanalysis,aswellasmuchmore. Foralistofavailabletitles,visitourWebsiteatwww.WileyFinance.com. iii P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD iv P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD Free Cash Flow Seeing Through the Accounting Fog Machine to Find Great Stocks GEORGE C. CHRISTY, CFA John Wiley & Sons, Inc. v P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD Copyright(cid:1)C 2009byGeorgeC.Christy.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,or,exceptfortheFreeCash FlowWorksheet,authorizationthroughpaymentoftheappropriateper-copyfeetothe CopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978) 750-8400,fax(978)646-8600,oronthewebatwww.copyright.com.TheFreeCashFlow Worksheetinwholeorinpartmaynotbereproduced,storedinaretrievalsystem,or transmittedinanyfromorbyanymeans,electronic,mechanical,photocopying,recording, scanning,orotherwise,exceptaspermittedunderSection107or108ofthe1976United StatesCopyrightAct,withoutthepriorwrittenpermissionofthePublisher.Requeststothe PublisherforpermissionshouldbeaddressedtothePermissionsDepartment,JohnWiley& Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748-6008,or onlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheir besteffortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespectto theaccuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreated orextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategies containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwitha professionalwhereappropriate.Neitherthepublishernorauthorshallbeliableforanylossof profitoranyothercommercialdamages,includingbutnotlimitedtospecial,incidental, consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outside theUnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Christy,GeorgeC. Freecashflow:seeingthroughtheaccountingfogmachinetofindgreatstocks/ GeorgeC.Christy. p.cm.–(Wileyfinanceseries) Includesbibliographicalreferencesandindex. ISBN978-0-470-39175-4(cloth/website) 1.Cashflow. 2.Cashmanagement. 3.Corporations–Cashposition. 4.Investment analysis. I.Title. HG4028.C45C5392009 332.63(cid:2)22–dc22 2008033211 ISBN-13978-0-470-39175-4 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 vi P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD For my mother, Kathleen Stinchfield Christy For my wife, Nobuko Miyachi Christy For our son, Andrew For our daughter, Anna and her husband, Evan vii P1:a/b P2:c/d QC:e/f T1:g FM JWBT020-Christy November25,2008 7:9 Printer:TBD Contents Foreword xv Preface xix CHAPTER1 Investing101 1 Price 1 FreeCashFlow 2 RiskandReturn 3 TheReturnMultiple 4 ReturnandPrice 4 Debt 6 Equity 9 DebtversusEquity 11 PrivateCompanyversusPublicCompany 12 CHAPTER2 TheAccountingFogMachine 15 GAAP:CompetingTheories,MattersofOpinion, PoliticalCompromises 16 GAAP:AccrualAbuse 17 GAAP:ErrorsBredbyComplexity 17 GAAP’SGap 18 GAAPEPS:AnIncompleteDefinition ofFinancialPerformance 18 GAAPEPS:InvestinginanEconomicVacuum 18 EBITDAisNotaCashFlowMetric 19 TheGAAPCashFlowStatement 19 BewaretheBalanceSheet 20 Liquidity 21 FixedAssetsandDepreciation 21 LeverageandDebtService 22 WhoseReturnonEquity? 22 ix
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