: It’s Earnings That Count: Hewitt Heiserman. by Talks at Google | 07 September Hewitt Heiserman authored “It’s Earnings That Count” and is finishing his second book, β€œThe Checklist Investor.” Learn. Hewitt Heiserman Jr. conceived the Earnings Power Chart, which is the subject of his book “It’s Earnings That Count” (McGraw-Hill, ). Mr. Heiserman is a.

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Newitt book has an accompanying website here. Good thing is, the book is as good as it sounds. The book is written in a clear, straightforward, reasonably heisfrman manner. For readers who are not that familiar with financial statements, there is a quick introduction to the various financial statements and explanations of key line items and accounting concepts.

For more experienced readers, they can skip over the basic stuff quickly to get to the meat. In addition to focusing on the evaluating the quality of earnings, hswitt book also goes into assessing management, competitive advantage, valuation, types of companies to avoid, and a long list of very good ideas on what to do and what not to do when heisreman your own investments.

I have not captured many of the things in the summary below because they are just too detailed and too many. I always enjoy books that go into details while still being concise and non-repetitive and this book delivers well. Overall, this is a very good book and I highly heiseman people to read this if they are doing fundamental analysis and managing their own investments! Heiserman gives a long list of ideas to become a better investor.

Three are particularly interesting to me:. It’s Earnings That Count: Forget the next Infy; Can you identify the next Satyam? You are commenting using your WordPress. You are commenting using your Twitter account. You are commenting using your Facebook account.

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It’s Earnings That Count : Hewitt Heiserman :

Book ReviewsValue Investing. Hejserman of investment in fixed capital i. Omission of investment in working capital Use of cash but not accounted for in the income statement.

Intangible growth-producing initiatives e. Two types of income statements are then suggested to solve the 4 problems above: A defensive income statement which addresses problems 1 and 2 by expensing the heisedman of cash each year, and helps to determine whether a company is able to self-fund. Read footnotes for legal proceedings that can seriously harm the company.

Check how often the company reported unusual losses e. Almost every major financial disaster was preceded by an earnings restatement. Make sure the company has not restated in the last several years.

Hewitt Heiserman (Author of Its Earnings That Count)

Intangibles can be impaired and quickly disappear from the balance sheet. In credit crunch times, intangibles are hard to sell. Large intangibles are also a sign of management overpaying for acquisitions.


Geiserman revenue growth comes from increase in units sold, followed by price increases. This measures how much of the profit goes to employees rather than shareholders. Defensive Income Statement Key concept A company can self-fund if it is producing more cash from ongoing operations than it consumes, even after taking into account its spending for growth i.

Start off with the standard Accrual Income Statement. Take a charge for investment in fixed hfwitt Look at capex-to-depreciation ratio to get a sense of the split between maintenance capex and discretionary capex. Maintenance capex should be slightly more than depreciation. Subtract all capex, and also the cash cost of any acquisitions found in Cash Flows from Investments because they are a use of cash, and the benefits are uncertain. Take a charge for investment in working capital Working capital assets include accounts receivable, inventory, prepaid insurance premiums, other current assets, etc.

Working capital liabilities include payables, accrued expenses, dividends payable, income taxes payable, and other current non-interest-bearing liabilities. Subtract the change in Net Working Capital working capital assets β€” working capital liabilities Rapid growth in receivables relative to growth in payables means trouble. Heiserma giving generous payment terms to persuade customers not to switch to a competitor Poor collection efforts Customers unable to pay their bills Customers unwilling to pay due to unresolved issues Large increases in inventory may be good accumulation for a holiday shopping season, or accumulation for a new product launchor bad production outpacing sales, inventory obsolescence, high storage costs Subtract any non-operating sources of cash, e.

These are not coming from operations and may not be present in future periods. An increase in deferred tax liability means the income tax provision in the income statement is higher than the required cash tax by heisedman amount equal to the increase in deferred tax liability.

This amount is non-cash at that period, hence should be reversed. Similarly, an increase in deferred tax heserman means the income tax provision is lower than the hewirt cash tax by an amount equal to the increase in deferred tax asset. However, this is a true cash charge, hence the amount should be subtracted.

Defensive Taxes is defined as Accrual Taxes i. If defensive heiserma i. Enterprising Income Statement Equity is more expensive than debt because If as an equity holder, you assume greater risk than debt holders, you need a larger payoff.

Debt is cheaper because it is a deductible expense There is an opportunity cost because the money can be invested in other businesses or instruments. Rules of thumb for depreciation period aka useful life Fortune type, profitable companies with positive net worth: Subtract any non-operating sources of cash, e. Hewtt Enterprising Interest contains interest on the capitalized operating leases. Since the income statement already includes lease expense, the interest on the capitalized operating hweitt need to be added back to the Income Statement else there will be double counting and the company will be hrwitt penalized.

To calculate Enterprising Taxes i. Start with Defensive Taxes i. Add the Interest Tax Benefit heisermwn the implied interest expense on operating leases. Make an assumption on the discount rate e. Capitalize the operating leases. Take the average of the capitalized lease value over 2 years. Add the Intangibles Tax Benefit. Subtract the original tax on non-operating income.


For any non-operating income that was on Accrual Income Statement, as the income would be removed from the Enterprising Income Statement, the tax on that income should be removed i. Quality of Profits and Earnings Power Charts Quality of Profits Chart For each year, show the accrual profits, defensive profits, and enterprising profits as 3 vertical bars.

Plot the results of the 3 bars across multiple years in yeiserman single chart. Plot the stock price as of each of the financial year-ends.

To ensure the stock price incorporates the results of that year, use the stock price that is 30 days after the company filed its K. Look for trends, and explanations for any sharp differences among the 3 types of profits. Unable to self-fund and create value, e. Able to self-fund but destroying value, e. Creating value but not able to self-fund, e. Have authentic earnings power β€” they are able to self-fund and create value, e.

Wrigleys Great companies keep on moving in an upper-right direction each year. Buy such companies when they are young. A turnaround candidate may reside in the other quadrants. Book value of equity includes fixed assets which heieerman likely overvalued on the balance sheet. Debt includes working capital lines of credit, current portion of long-term debt, long-term debt, and capital leases. Debt equivalents are capitalized operating leases.

Why change the site?

Return on Greenest Dollar Measures the return made on the latest investment in capital. Tells you whether management is allocating capital intelligently. Measuring Management Look for the following: Competitive Heiseramn Ask yourself: What makes this company special?

How long will it remain unique? Back out the required Earnings 10 years later. Calculate the required Heiseramn of earnings. If not reasonable, put in watch list. Three are particularly interesting to me: Formulate an investment strategy, write it down. Specify the criteria of companies you look for, holding period, buying and selling rules, etc.

Learn from your mistakes. Get regular exercise, be positive. Money has a low correlation with happiness once basic needs are met. Leave a Reply Cancel reply Enter your comment here Fill in your details below or click an icon to log in: Email required Address never made public.

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