EPS trends versus cash-flow trends?

Earnings are easy to manipulate, especially by playing with reserves. The best example at the moment is the Detroit auto companies. They have been exaggerating their earnings for years by not taking the amount that they should for reserves for retirement expenses, always saying "we'll catch up later". Now it's later.

Hey,

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The calculations of earnings are flexible within the FASB GAAP rules. Cash is cash but again free cash flow is derived from adjusted earnings so...

Both are useful and should be looked at simultaneously. When the P/CF (price to cash flow) ratio is low (single digits) that means that you can buy shares of stock at a low multiple of the companies cash which is a very good valuation metric. You are not buying on a forecast of future earnings but real cash money. Think of P/CF as what you will pay for every dollar of cash which is real and liquid to a companies managment.

Many companies in this recession are cash rich (specifically tech companies) however their earnings and/or stock prices are soft. If a company has good cash-to-debt ratios and a good track record of earnings growth (EPS), prior to this recession, traditional value investing says that the stock price is cheap and is a good buy.

Looking at more metrics is always better than looking at fewer metrics when analyzing a company's financial strength. Only when you get stuck in "analysis paralysis" that is spinning your wheels, non-stop, looking at numbers, and not actually investing/trading, does it become a problem.

EPS and P/CF are important for EVERY company in EVERY sector.

My $0.02

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not wanting to deprive you from your academic or work obligations, i'll keep it short and sweet.

eps is basiclly a tool to calculate profit for the investor. from this the investor then can make a calculated judgement considering the risk they will take, wether the investor would like to invest in the company or not.

now the cash flow analysis, such as ebitda, is mainly a tool to calculate the company's ability or capacity to generate cash. this is widely used by financial institutions such as banks in their risk analysis to measure the company's ability to repay debt and debt service.

so which one is preferable? i believe both are important. for a well establish company, normally do not have issues with cash flow because they have experience in managing cash flow and they have easier access to the market to raise cash. therefore the issue will mainly be about profitability.

on the other hand, for a relatively new company, most likely the issue will be cash flow becasue a new company will have to invest on many things in the beggining, im not talking about items like equipments and machinery, but investment such as building a name through marketing, building relationship with suppliers and buyers through favourable terms and so forth.

hope my answer gives you a more understanding about eps and cashflows