Earnings Growth Rates And Cash Flow example essay topic
360 words
Amazon and Barnes and Noble In the decision of investing in Amazon or Barnes and Noble, I recommend neither. Looking at the present state of both companies, neither displays good, strong expectations of profits. Instead, I see both companies with low projected earnings growth ratios and negative cash flow. Projected earnings growth rate, also known as the PEG ratio, is a widely used indicator of a stock's potential value. By some, PEG ratio is favored over the price earnings ratio because it accounts for growth. The PEG ratio is determined by the price earnings ratio divided by the its projected earnings growth rate. For Amazon, their PEG ratio is 2.74 / -0.57 = 4.8, using next year's growth rate. For Barnes and Noble, their PEG ratio is 0.67 / -0.23 = 2.96, using next year's growth rate. The lower PEG ratio, in this case Barnes and Noble, means that the company's stock is undervalued. Analysts will usually recommend undervalued stock. Cash flow is the amount of cash a company generates and uses during a period. Cash flow can be used as an indication of a company's financial strength.
To find the cash flow used during a company's operations, we must look at the company's net cash flow gain / loss from operations. This will tell us if, indeed, the company has cash flow. Amazon has $1 billion in cash, but its net cash flow loss from operations is a negative number (- $90,875). This indicates that Amazon has zero cash flow and must be liquidating its assets in order to source this amount of cash used in the company's operations. Barnes and Noble has approximately $1 billion in cash and its net cash flow loss from operations is a negative number (- $58,443). This indicates that Barnes and Noble also has zero cash flow and must be liquidating its assets in order to source this amount of cash.
In conclusion, with the knowledge of the companies projected earnings growth rates and cash flow, I recommend that neither company is a good investment.
