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Shares follow cashflow not profit
June 29th, 2020
⏰ 1 minute read
⏰ 1 minute read
This company reported profits, but negative cashflow pushed up the debt & that’s what matches the share price
Why cashflow?
One of the most often asked questions we get is why do we use cashflow to value the companies we cover in Sharpfokis Saham rather then the traditional net profit. The reason is because accounting profit has absolutely nothing to do with the performance of the shares. The only thing which matters is the cashflow. Here’s a perfect working. example.
PE
We won’t say which stock this is, but it’s a very well run & well respected company which has been listed for just over 8 years. For the last 6 years the average net profit is about Rp1.5tn. The market value today is just Rp5.5tn, which is 3.6x PE! That should mean it’s very cheap & attractive, a value stock.
Cashflow
But despite all those earnings, the share price has fallen year after year. The total decline is almost 70%! The reason is the cashflow. The free cashflow we monitor, which is the combination of operating & investment has managed a small positive, but only about Rp150bn a year, far less than the profit. But this is not the complete cashflow.
Shares follow debt
Because the company announced profits, they’ve paid dividends totaling almost Rp3tn. Because there wasn’t enough cashflow to pay for this, they had to borrow money. Also some liabilities which couldn’t be paid had to be converted to debt too. The net result is debt has increased Rp3tn. Negative cashflow means higher debt & a lower share price. They match perfectly.
Tax
To add insult to injury, the accounting profits are what is used to calculate the tax. Despite losing money & having to borrow an extra Rp3tn, this company has also had to pay a cash tax payment of Rp1.8tn during the same period! Never ever use profit to value a company. Follow us & focus instead on the real cashflow.
One of the most often asked questions we get is why do we use cashflow to value the companies we cover in Sharpfokis Saham rather then the traditional net profit. The reason is because accounting profit has absolutely nothing to do with the performance of the shares. The only thing which matters is the cashflow. Here’s a perfect working. example.
PE
We won’t say which stock this is, but it’s a very well run & well respected company which has been listed for just over 8 years. For the last 6 years the average net profit is about Rp1.5tn. The market value today is just Rp5.5tn, which is 3.6x PE! That should mean it’s very cheap & attractive, a value stock.
Cashflow
But despite all those earnings, the share price has fallen year after year. The total decline is almost 70%! The reason is the cashflow. The free cashflow we monitor, which is the combination of operating & investment has managed a small positive, but only about Rp150bn a year, far less than the profit. But this is not the complete cashflow.
Shares follow debt
Because the company announced profits, they’ve paid dividends totaling almost Rp3tn. Because there wasn’t enough cashflow to pay for this, they had to borrow money. Also some liabilities which couldn’t be paid had to be converted to debt too. The net result is debt has increased Rp3tn. Negative cashflow means higher debt & a lower share price. They match perfectly.
Tax
To add insult to injury, the accounting profits are what is used to calculate the tax. Despite losing money & having to borrow an extra Rp3tn, this company has also had to pay a cash tax payment of Rp1.8tn during the same period! Never ever use profit to value a company. Follow us & focus instead on the real cashflow.
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