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In today's blog we take a look at the imporance of the cashflow statement in companies financial results. In particular cash generated by the operations of the company.
While earnings can be influenced by a multitude of things (including asset revaluations, sale of assets, forex movements etc), cash and cash generated has for less potential for being "manipulated" or excessively inflated. Thus providing a truer picutre of the underlying company's ability to generate profits. |
PE and PCGPS ratios
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Using cash flow statement as a share valuation tool
In our stock valuations we often refer to the cash generate per share by the company in question as we feel this provides a greate picture of just how cash generative the business is. In addition to this if the cash generated and earnings of the company differ vastly (then alarm bells should be ringing). For example let's say the earnings per share is R10.00 a share, while the cash generated per share is only R1.00 a share, one has to wonder what the earnings per share are made up off? Is it continued asset revaluations or earnings which are inflated in other ways?
Below we look at a a few shares (including market shaker for all the wrong reasons: Steinhoff) and we compare their earnings per share to their cash generated per share and investigate whether the cash generate per share can be used as a indicator to assess the overall quality of the reported earnings.
The list of shares we will be looking at is as follows:
Steinhoff (SNH)
Argent (ART)
Pioneer Foods (PFG)
MTN (MTN)
Bid Corp (BID)
Onelogix (OLG)
Capitec (CPI)
We calculated the cash generated per share for each of these companies (for SNH we used the last annual report's financial results. And yes we know these numbers are not to be relied upon but we adding SNH to this just for the fun of it). We then expressed the company's share price over cash generated per share (similar to a PE ratio where the price of a share is expressed over the earnings of a company).
Below the results:
Steinhoff (SNH)
Argent (ART)
Pioneer Foods (PFG)
MTN (MTN)
Bid Corp (BID)
Onelogix (OLG)
Capitec (CPI)
We calculated the cash generated per share for each of these companies (for SNH we used the last annual report's financial results. And yes we know these numbers are not to be relied upon but we adding SNH to this just for the fun of it). We then expressed the company's share price over cash generated per share (similar to a PE ratio where the price of a share is expressed over the earnings of a company).
Below the results:
From the above graphic it is pretty clear that the PE ratio is far greater than the cash generated per share ratio. This is due to the fact that cash generated per share is far higher than actual earnings per share. As earnings reported includes all operating expenses and taxes paid, while cash generated by operations just focuses on the cash generation ability of a company.
For OLG for example, while their reported earnings came in at 29.6c a share, they generated a very healthy R1.20 in cash per share. And with a share price of just R3.20, its PCGPS ratio is exceptionally low. While Bid Corp's PCGPS ratio is far higher than that of OLG, with it sitting at closer to 15.. Thus the cash generated by Bid Corp per share amounts to roughly 6.8% of Bid Corp's share price, whereas for OLG this was sitting 37.5%
Does the CGPS provide a magic pill in determining whether a share is undervalued or not? Absolutely not, but it does provide readers with a good indication of just how cash generative a business is (assuming of course they dont cheat and defraud investors with unreliable financial statements as is the case with Steinhoff).
For OLG for example, while their reported earnings came in at 29.6c a share, they generated a very healthy R1.20 in cash per share. And with a share price of just R3.20, its PCGPS ratio is exceptionally low. While Bid Corp's PCGPS ratio is far higher than that of OLG, with it sitting at closer to 15.. Thus the cash generated by Bid Corp per share amounts to roughly 6.8% of Bid Corp's share price, whereas for OLG this was sitting 37.5%
Does the CGPS provide a magic pill in determining whether a share is undervalued or not? Absolutely not, but it does provide readers with a good indication of just how cash generative a business is (assuming of course they dont cheat and defraud investors with unreliable financial statements as is the case with Steinhoff).
Let us know what you thought of this article: |