Creative Cash Flow Reporting by Charles Mulford and Eugene Comiskey is an exhaustive (perhaps exhausting to the un-enthused) account of all things cash flow-related.
The book is unofficially divided into three parts: The basics and history of cash flow statements/analysis, the elements of adjusting cash flow, and cash flow analysis. Most of the chapters are practical and informative, with one exception. The final chapter, detailing the calculation and analytical uses of free cash flow, was probably the weakest of the ten. It doesn’t do a lot to build on the material from previous chapters, and most of its points about adjustments and methods to calculate free cash flow had already been made in earlier chapters. This is hardly a major issue, but it was an odd note for an otherwise excellent book to end on.
One of the book’s major themes is the shortcoming of EBITDA as a proxy for cash flow. If I remember correctly (it’s been a while), their objections are similar to those Seth Klarman raised in his book Margin of Safety: EBITDA ignores the cash expenditures necessary to maintain a business and can therefore overstate the amount of genuine cash flow available.
Klarman’s focus was more on capital expenditures, but Comiskey and Mulford extend that to items like working capital. Obviously a book focused exclusively on cash flow analysis is going to favor actual cash flow analysis over a common approximation, but I think their arguments are persuasive.
Perhaps the authors’ biggest point, which they hit on hard from the opening chapter on, is that -- contrary to popular opinion -- cash flow is every bit as susceptible as earnings to manipulation both within and without the boundaries of GAAP.
A common example that the authors return to several times is Enron. After making their suggested adjustments, Enron’s apparently healthy cash flow would have been reduced to a multi-billion dollar cash outflow. Enron’s investors probably would have found that to be useful information, but I would have been more interested to see the same methodology applied predictively to more mundane situations. In Howard Schilit’s Financial Shenanigans, there was an ongoing track record of CFRA warnings that Schilit could point to (admittedly with the potential for cherry-picking) to demonstrate the effectiveness of his warning signs. Since the authors here seem to be professors first and foremost, that’s an unreasonable expectation, but I feel like it was an addition that could have improved the book. They come close with the hypothetical cases in chapter 9, but to me real-world examples based on then-current predictions would be more compelling.
Ultimately I think that’s a minor quibble, because this book effectively accomplishes what it sets out to do: Illuminating the details of cash flow reporting and analysis. For the spreadsheet-oriented, the authors even provide examples of cash flow analysis worksheets to break operating cash flow down by sustainability and by claims priority.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Received a review copy of this book from Wiley.