Analyzing the Statement of Cash Flows

I’m sitting in my Financial Analysis and Valuation class taught by Julia Plotts.  I’ll admit, I took the class because I needed a “gimme” to lighten my workload as a I seek both a school-year and summer internship.   A lot of the accounting and valuation topics are review, however, today I really appreciated the Professor’s points as we analyzed Blockbuster’s financial statements.  When analyzing a statement of cash flows, she suggests the following:

  • Scan the Big Picture
  • Pinpoint Good and Bad News
  • Analyze the Major Sources and Uses of Cash
  • Determine whether CFO covers CapEx (i.e. do they have to raise debt or equity to grow the business)? In other words, do a “sources” and “uses” of cash analysis.
  • What does the Statement of Cash Flow tell us about the company’s positioning?

(Sidenote: For anyone considering taking this class, I highly recommend both the subject matter and the Professor!)

Investing in Homes: Look at the Price-to-Rent Ratio

Similar to the assured income provided by dividends on stocks, rental income provides real estate investors with a defined cash flow for return on investment, as opposed to capital appreciation (i.e. praying that real estate values increase).  Stock investors prefer higher yields to lower ones, so as a real estate investor, wouldn’t you also like a higher yield?  Yes. And the yield can be measured by the Price-to-Rent Ratio.  Trulia, a real estate search engine, has created an interesting map of the U.S. which displays its Rent vs. Buy Index for 50 of the largest cities by population.  Here is a snapshot.

Trulia’s Rent vs. Buy map relies on its calculation of the Price-to-Rent Ratio, which Trulia more fully explains as follows: (more…)

My LinkedIn Network, Visualized

I had some fun playing around with LinkedIn Labs’ new network visualization tool.  Here is a picture of my network.

The red USC cloud (fitting) and the green Duff & Phelps cloud aren’t surprising, however, I find the blue San Francisco cloud interesting.  Nearly everyone that I met during undergrad sits in the San Francisco cloud along with my broader San Francisco network accumulated since high school.  I’m guessing this means one of two things.  Either, I am well connected in San Francisco so LinkedIn grouped all UCSB contacts into this cloud, or  I never really branched out during college.  I’m hoping it’s the former!  Now go have some fun with LinkedIn’s new toy.

Houses as a Better Hedge Against Inflation Than Gold

I’m sitting in my entrepreneurial finance class taught by Duke Bristow.  We have been discussing the “gold bug” that everyone has caught over the past few years.  When asked whether inflation is better hedged with houses or gold, my professor, a Financial Economics PhD, argues the case of homes on the following points:

  1. With inflation, house prices go up;
  2. By owning a home, one can either rent it for cash flow, or live in it for avoided rent;
  3. There is a tax benefit to owning a home; and
  4. By financing the home loan with a fixed-rate loan, you (as the borrower) can put the inflation risk on the lender (i.e. the bank).

I’ve never been sold on the case for gold, particularly because it doesn’t throw off any cash. These four points are the nail in the coffin for me (for the time being).

If you want to read more about the merits of gold as a store of value, I suggest reading this memo by Howard Marks at Oaktree Capital.