Best Financial Statement

1159 Words Apr 24th, 2008 5 Pages
What 's your favorite financial statement and why?"

The question was spoken quickly and with a tinge of annoyance, as my interviewer eyed me disdainfully from his cushy black leather chair. The investment banker had little time to conduct these ridiculously long interviews that are standard fare for analyst candidates.

I shifted uncomfortably in my seat and scanned my frazzled brain for the "right" answer.

"Well, of course all three financial statements should be studied in conjunction with one another, but if I had to choose just one, it would be the balance sheet because it represents the foundation upon which a business is built."

That sounded good, right? Diplomatic, intelligent, maybe even a bit Wise. But did my interview
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In Microsoft 's case, that number is $7.41 billion. That 's a nice chunk o ' change over a nine-month period. Notice that the company 's accounting profit, net income, is substantially less at $5.58 billion.

If you take away nothing else from this article, remember this: Net income is a fiction; cash from operations is reality.

For an investor, operating cash flow is the profit that really matters. Net income involves all sorts of distortions that muddy the waters of understanding the true cash profitability of a company.

So, you might be wondering, "Does net income have any good use?" It 's a good question. The only cases where net income has any real meaning is for some mature companies like Wrigley (NYSE: WWY), which has net income that closely approximates operating cash flow. Even so, operating cash flow still stands as the true tally of a company 's cash earnings.

Have I convinced you that operating cash flow is a much more meaningful figure than net income? If so, you 'll follow my reasoning that the net profit margin is an inferior measure of profitability to what I call the "operating cash flow margin." This figure is analogous to the net margin, except that instead of dividing net income by revenues, the calculation is:

Net cash from
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