Metrics

Earnings Correlations

Adjusted (Operating) Earnings

This metric is the default metric for FAST Graphs, and is generally the best metric to use for most companies (except for REITS, they use FFO and AFFO as you’ll see below). It uses the reported earnings instead of GAAP earnings from companies which adjusts for 1 time charge offs and things that do not represent normal operations of the company.

Generally, where earnings go the stock price will follow in the long run, and FAST Graphs proves that time and time again. You can clearly see this in the examples below.

Ascena Retail Group Inc (NAS:ASNA) had exceptional earnings growth just until a few years ago as displayed by the orange line and green shaded area. As of recent, the company’s earnings have plummeted, and so has the stock price. Where earnings go, stock price follows.

Crown Holdings Inc (NYS:CCK) shows a positive relationship between the earnings and stock price. The stock price may disconnect occasionally, but in the long run it always tends to follow the earnings.

Owner’s Earnings

Owner’s Earnings utilizes Warren Buffett’s preferred formula for valuing companies.

Net Income
+ Depreciation and Amortization
+/- Other non-cash charges
– Maintenance Capital Expenditures

This is all then divided by the diluted common shares outstanding to give a per share number to correlate to.

Basic Earnings

Basic earnings is simply Net Income/Common Shares Outstanding. This basically shows a snapshot of how the company is doing today.

Diluted Earnings (GAAP)

Diluted Earnings is Net Income/Diluted Common Shares Outstanding.
This is slightly different than Basic Earnings, because it is showing more of a worst-case-scenario. Diluted shares include all common shares outstanding plus the total number of shares the company would issue if all convertible bonds or anyone with stock options traded in for stock.

Cash Flow Correlations

Operating Cash Flow (OCF, FFO)

Operating Cash Flow simply plots the OCF per share to correlate it to stock price. Stock price doesn’t always correlate to this metric, but it is still important to look at the see the stability of Operating Cash Flow for the selected company.

You’ve probably noticed that “FFO” is included with “OCF”. This is because this is the metric to utilize when looking at REITs. REITs report both FFO and AFFO and they are the industry standards used to value the REIT using those two metrics.

There are some cases though where Operating Cash Flow does correlate to stock price better than any other metric. An example of this would be Amazon (NAS:AMZN).

AMZN really doesn’t correlate to Adjusted (Operating) Earnings as most other companies do, and that partly has to do with Jeff Bezos (The Founder of Amazon) telling shareholders that AMZN is not going to focus on earnings, but cash flow instead. The first image below is AMZN plotted using the Adjusted (Operating) Earnings, and as you can see there is a large disconnect between the stock price and the earnings.

This second image shows AMZN plotted using Operating Cash Flow over the same timeframe, and there is undeniable evidence showing that AMZN follows where its Operating Cash Flow goes.

Free Cash Flow (FCF, AFFO)

Free Cash Flow plots Free Cash Flow per share and compares it to stock price. Just like OCF above, FCF doesn’t always correlate perfectly with stock price, but seeing stability in the metric is extremely important.

FCF will generally be less stable than OCF because it accounts for Capital Expenditures for the year.

FCF = OCF – Capex.

As discussed above about REITs, Free Cash Flow will represent AFFO when valuing a REIT.

Intrinsic Value Correlations

EBITDA/Share

This metric plots the EBITDA per share of the company. This is a widely used metric, because it is viewed as a “soft form” of Operating Cash Flow. As Warren Buffett puts it, it is Earnings before all of the bad stuff.

EBITDA is defined as Earnings Before Interest Taxes Depreciation and Amortization.

EBIT/Share

EBIT/Share just gives another look into company valuation. It takes into account depreciation and amortization, and is good to compare against EBITDA/Share to see how much depreciation and amortization the company incurs each year.

Net Change in Cash (CFL)

This simply shows the net change in cash on the balance sheet the company has each year and graphs it as a per share item. It is simply Ending Balance of Cash – Beginning Balance of Cash.