Not really – 4 consecutive years is enough for me.

“Good thing you bring up SWI because there is a high chance that it will end up just like FSLR.”

Why in the world would SWI have anything to do with FSLR? SWI is an enterprise software company. FSLR is a solar company.

“…SWI is another bad example”

Of course it is. Just like the first one I provided. If it dilutes your contention, then surely it is just “a bad example”.

“…if you don’t find this method useful, by all means, don’t use it. No one is forcing you.”

I have not and would not use this method, for reasons that are now obvious to the objective reader. My intention was to inform readers who may not know better. In my opinion, it is a disservice to recommend analysis techniques that are useless at best, and harmful at worst.

JBSS is another nut company and similar to Diamond in many ways. Their goodwill and intangibles are only 4% of their assets.

Johnson & Johnson is 31%.
Proctor & Gamble is 65%
Kraft is 66%.
Diamond Foods is 67%.

Although it sounds high, other companies are up at those levels as well.

You state “The company purposely paid money in advance when it shouldnt have, thus increasing the expenses in that year, but making the following year much better than it should be.”

What happened is they made a payment to the growers in September, which was their new accounting cycle, but growers content that it was a payment for the previous season’s walnuts. In essence, the claim is that they made payments for one crop year in the following accounting year to hide the true cost of goods and inflate their profit margin for another year, keeping a high stock price.

The correction would have come in the future once the Pringles deal went through and may have even been hidden in the costs of merging the companies, allowing them to purchase a company with shares of Diamond that were artificially inflated due to accounting manipulation, effectively pump and dumping their way into ownership of a large portion of a much more valuable company.

So take a look at FLSR and see what happened. That should answer your question.

Plus, if you don’t find this method useful, by all means, don’t use it. No one is forcing you.

[...] to a company like Timken (TKR) which also grows through acquisitions, there is close to no growth expected from [...]

[...] the new accrual method, stock could be worth around [...]

Alright, so even though you have not bothered to answer any of the questions posed in my original comment, I went ahead and performed the exercise again, as you requested in your recent comment quoted above. This time, I looked at a company I have been interested in for some time – SolarWinds (SWI). It is an enterprise software company.

For the fiscal years of 2007-2010, its BS Accrual Ratio has been 989.6%, 87.5%, -112.1%, and 163.5%, respectively. So, 3 of the past 4 years exceed your 80% threshold; and all 4 years exceed it on an absolute value basis.

Meanwhile, SWI boasts returns on capital in the low-to-mid twenties, and the stock has appreciated 68% over the last year.

I think it’s safe to say we can agree to disagree on the usefulness (or blatant lack thereof) of this method as a “systemized check to see whether future problems could arise”. Based on the exercises I have performed here, at your request, the evidence is pretty clear to me.

i’m very very new at this. hope u can help out.

i do not have any strong educational background on finance or accounting, so most of the time i get confused with some of the financial formulas. So, i hope u would understand how little knowledge i have, but i’m still learning

i have just finished reading “Fundamental Analysis for Dummies”, but the book doesn’t provide FCF formula.

only today i found out about “Owners Earnings” aka FCF, and because Warren Buffet is using it, i would too.

i’m currently making a personal excel spreadsheet. My purpose is because i want to have a deeper understanding of its formulas, its explanation, how to extract information from financial reports.

i want to start from the bottom/basic.

Now, back to my question and Its about capital expenditure.

1. Is it previous year (TA-TL) minus current year (TA-TL)or the other way around.

2. is it suppose to be just a positive number? because, if its negative and i put it in the Owner earnings formula it would become positive.

i tried to google it, but it seems that most of the people in most forums are quite advanced. so, its not discuss whether its supposed to be +ve or -ve.

Good information. Thanks. Only something an insider in the industry would know.
Only increases my growing suspicion of accounting shenanigans.

Unlike DMND, CF has increased cash, virtually zero short term debt and I dont know what the huge increase in long term debt and total liabilities for 2010 is.
Also, unlike DMND, CF accruals have been perfectly fine and reasonable up to 2010. If their 2011 accruals are up in the 100% range for 2-3 years in a row, then that requires further digging. So what would my conclusion be for CF? Nothing. It’s fine.

The accrual method isn’t meant for determining the long term return potential. It’s a systemized check to see whether future problems could arise.

Find me an example where the actual balance sheet and cash flow accrual ratio using the formulas given is greater than 80% for 2-3 years and then we’ll continue this.

I went ahead and performed this exercise for my favorite stock, CF Industries (CF). I utilized the ‘Balance Sheet Accruals Ratio’ that you describe in this post: http://www.oldschoolvalue.com/blog/valuation-methods/you-need-to-determine-earnings-quality-through-accruals/ (despite some flaws in that evaluation metric that we could get into).

What I found is that CF’s BS Accrual ratio has been all over the place through the years. For FY 2004, it was -30.8%. For the most recent year for which there is annual data (FY 2010), the ratio was 146.3% (well above your 80% threshold). Yet CF has returned 517% over the last 5 years, or 39% avg annual return. It’s been one of the best stocks I’ve ever come across.

This empirical exercise merely confirms the suspicion I already had, regarding your contention about accruals. Namely, the mere existence of accruals (even if sizable) really has very little at all to do with analyzing a stock’s long term return potential. All accruals mean is that the company in question does not operate on a cash basis.