subject: Why Alberto-culver's Earnings Aren't So Hot [print this page] Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.
Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the latest batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.
Calling all cash flows:- When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow (FCF) once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That brings us to Alberto-Culver (NYSE:ACV), a beauty-care products company in the process of being acquired. Its recent revenue and earnings are plotted below. Over the past 12 months, Alberto-Culver generated $111.6 million cash on net income of $155.3 million. That means it turned 7% of its revenue into FCF. That sounds OK. Still, it always pays to compare that figure with sector and industry peers and competitors, to see how your company stacks up.
Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the latest batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.
Calling all cash flows:- When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow (FCF) once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That brings us to Alberto-Culver (NYSE:ACV), a beauty-care products company in the process of being acquired. Its recent revenue and earnings are plotted below.
Over the past 12 months, Alberto-Culver generated $111.6 million cash on net income of $155.3 million. That means it turned 7% of its revenue into FCF. That sounds OK. Still, it always pays to compare that figure with sector and industry peers and competitors, to see how your company stacks up.
