I was listening to another video on Columbia's website where a speaker said that do not use third party tools and websites for your financial statements. He gave the example of CapitalIQ and said that for one of the companies he was looking at, he found the numbers incorrect. He said such tools may save you a couple of hours but it is not worth it. Also, he said that you are bombarded with hundreds of ratios and numbers and when all you should be looking at are a few numbers for any company. I kept wondering about that last night. I have been using Yahoo Finance myself for several years now as a quick way to look at the financial statements and the key statistics for a company such as debt, insider holding etc.
I recently posted an article titled Netflix v/s Gamestop. I compared the two companies and presented some financial numbers. Most of them came from Yahoo Finance. Today, I received an email from a reader that my calculation for free cash flow for Netflix was incorrect and that I should subtract the cost of purchasing their library.
In my original calculation, I used Yahoo Finance to calculate Free cash flow for Netflix. I computed Free Cash Flow as Cash from Operations - Capex.
FCF = 325 - 46 = $279 million (FY2009)
However, when I looked at the 10k on the company website , I see the line items broken down in the cash flows from investing activities. Apart from the "Purchases of property and equipment" at $46 million, I also see "Acquisitions of content library" and "Proceeds from sale of DVDs" This content library cost was $193 million for the year 2009 and the sale of DVDs was $11 million.
In the case of Netflix, Capex should really include these costs. In manufacturing firms, we are used to seeing the Capex include expenditure on Plant, Property and Equipment. In the case of Netflix, the equipment can be equated with their content library. So, If i take this into account the Free Cash Flow for Netflix for 2009 will be
FCF = 325 - 46 - 193 + 11 = $97 million.
Then, Price / FCF = 63.8
I then looked at the 10k for Gamestop and I found the 'Purchase of property and equipment' as $164 million, acquisitions at $8 million and Other at $15million. So, the FCF for Gamestop does not change. FCF = 644 - 164 = $480 million. and Price / FCF = 6. In fact, GameStop includes the cost of opening new stores as well as renovating stores in the same line item.
This example proves the benefits of looking up the financial statements from the 10K and 10Q versus relying on 3rd party websites. In most cases, you will not find major differences. However, as this example shows there are times when the numbers will change a lot. In my example, Netflix's FCF multiple changed from 22 to 64!!
There are so many other benefits of just reading the SEC filings. You learn about the business much better by reading what the management is telling you in the Management Discussion and Analysis (MDA) section, the risks associated with the business, footnotes to the financial statements.
Disclosure: I am long Gamestop via shares and call options at the time of publishing this post. I do not have a position in Netflix currently. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.
I recently posted an article titled Netflix v/s Gamestop. I compared the two companies and presented some financial numbers. Most of them came from Yahoo Finance. Today, I received an email from a reader that my calculation for free cash flow for Netflix was incorrect and that I should subtract the cost of purchasing their library.
In my original calculation, I used Yahoo Finance to calculate Free cash flow for Netflix. I computed Free Cash Flow as Cash from Operations - Capex.
FCF = 325 - 46 = $279 million (FY2009)
However, when I looked at the 10k on the company website , I see the line items broken down in the cash flows from investing activities. Apart from the "Purchases of property and equipment" at $46 million, I also see "Acquisitions of content library" and "Proceeds from sale of DVDs" This content library cost was $193 million for the year 2009 and the sale of DVDs was $11 million.
In the case of Netflix, Capex should really include these costs. In manufacturing firms, we are used to seeing the Capex include expenditure on Plant, Property and Equipment. In the case of Netflix, the equipment can be equated with their content library. So, If i take this into account the Free Cash Flow for Netflix for 2009 will be
FCF = 325 - 46 - 193 + 11 = $97 million.
Then, Price / FCF = 63.8
I then looked at the 10k for Gamestop and I found the 'Purchase of property and equipment' as $164 million, acquisitions at $8 million and Other at $15million. So, the FCF for Gamestop does not change. FCF = 644 - 164 = $480 million. and Price / FCF = 6. In fact, GameStop includes the cost of opening new stores as well as renovating stores in the same line item.
This example proves the benefits of looking up the financial statements from the 10K and 10Q versus relying on 3rd party websites. In most cases, you will not find major differences. However, as this example shows there are times when the numbers will change a lot. In my example, Netflix's FCF multiple changed from 22 to 64!!
There are so many other benefits of just reading the SEC filings. You learn about the business much better by reading what the management is telling you in the Management Discussion and Analysis (MDA) section, the risks associated with the business, footnotes to the financial statements.
Disclosure: I am long Gamestop via shares and call options at the time of publishing this post. I do not have a position in Netflix currently. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.
