Originally Posted by lonewolf210
Which is my point the profit is kind of meaningless but you can get some idea of the company's health by analyzing the cash flows.
Please correct me if I am wrong. I use started my finance mba (no finance background) and am trying to use this as a real world application of the stuff I am learning
The job of management is almost always to maximize shareholder value, and that is where the current debates lies with the politicians. Boards almost always give management incentives based upon goals that often times include shareholder value. Buying companies or doing buybacks with borrowed money can add to earnings (and management incentive worth tens of millions of dollars), but does that always add to the economic value of a company?*
Profit isn't meaningless. Profit, however, isn't the only way to value a company and certainly isn't always important for the valuation of growth companies, companies that are asset sales, etc. As you mentioned, CFFO can be important, price/sales, etc. A lot depends on the type of business the company is in and how companies in that industry are traditionally valued, how fast the company is growing, what accounting rules can be used, how much risk is involved with the company, the whole Michael Porter thing, etc.
Most companies are valued by using a discount model of some kind. Whenever you use estimates, you have the GIGO issue. This is why a seemingly insignificant earnings or sales miss can kill the value of a stock...if the analysts see this as a trend the models they use will forecast a lower present value of the stock.
A CFO is the key to the financial reporting of a company. The joke is that a great CFO will make the earnings anything he wants, but in reality the CFO is a tool of management. For example, if management is trying to show gradual increases in earnings (more volatile earnings companies can be valued with lower P/E ratios due to the additional risk), the CFO will time everything from acquisitions, tax payments, changing accounting methods, revenue recognition, etc. to make the numbers work. It is the job of the securities analyst to read though all this crap and get an idea about what is really happening with the earnings. For example, if the analyst sees earnings continue to increase while at the same time CFFO continues to decrease, he/she will see this as a big red flag. Yes, the purpose of all our accounting standards is transparency, but in reality a lot can be hidden for a while. Guys like Howard Schilit made a lot of money as forensic accountants consulting to institutions, helping their analysts navigate through complicated financial statements.
The problem with a MBA is that what happens in practice is a lot different than what happens in theory. A CPA with expertise in relevant areas is great at understanding accounting methods, but not necessarily at strategy. A CFA has a background in a lot of stuff relating to security analysis, but is not necessarily an expert in accounting issues. Therefore, good analysis depends upon understanding strategy, accounting and security analysis. For example, a some analysts are now starting to value a bunch of old-line companies downwards due to post retirement pension obligations being wrongly valued. These companies are using 8% return assumptions, and in order to get that with near zero real interest rates a 10% equity return assumption must be used (Hint: Compound $1,000 at 10% from the date George Washington become president and you will have more money than the GDP of the USA...and a whole lot more. No one can become that rich.). An understanding of this includes an understanding of accounting, financial analysis and strategy.
Tesla won't be making money for a while. The cars they produce seem excellent. The question now is if there are buyers for the new model. The stock seems to indicate there will be, but time will tell. In the skiing space (this is a skiing website) there isn't much to invest in outside of sporting goods companies, where skiing is a small part of the overall business. Vail Resorts has done extremely well thanks to the EPIC Pass giving dependable revenue (a lot hits this Q since we all got billed for the full amount two weeks ago) and the acquisitions paying off. Debt coverage is certainly manageable. As debt gets paid down the reported profits will increase.
If you want to work as an analyst on Wall Street, the MBA/CFA combination will likely help your career. A CPA/CFA combination will keep you employed forever.
* According to a new Cornell study, it doesn't: http://www.ilr.cornell.edu/sites/ilr.cornell.edu/files/ICS_Brief_on_TSR_092915.pdf
Edited by quant2325 - 10/4/15 at 11:00am