Forum Archive Index - March 2004

["Karyn W" <karyn_in_oz@hotmail.com>]

Hi Harley
There is very little relationship between reported earnings per share, and 
the ability to pay a dividend.  This is because earnings per share is a 
non-cash based figure, as it includes items such as amortisation and 
depreciation.  Dividends on the other hand depend on a companies ability to 
generate free cashflow that isnt required for other purposes such as working 
capital or debt repayments.
A company may be generating healthy operating profits (ie. sales less 
expenses), thus have a heap of cash sitting in the bank due to positive 
cashflows, but still report poor earnings per share or even a loss as it 
writes down or depreciates asset values and goodwill (AMP's latest results 
is a classic example.  Billion dollar loss, but great EBITDA - hence the 
share price went up) - however these writedowns dont effect the company's 
cash position, or its ability to pay a dividend.

It pays to look behind the "creative" accounting figures, to the cashflow 
numbers and business fundamentals - or as someone famous once said "Cash is 
King"  :-)

Karyn

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