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Three Companies That Can Benefit from China's Stimulus Package

correction: 3.77 TRILLION Yuan.

The Coming Economic Collapse, Part 3

555' 5 1/8"

A.M. Castle Teaches a Lesson in Inventory Accounting

Saj, True, I should have indicated pretax profit or operating income instead of net. Also, the $23mn Lifo impact was all in Q1 2009 (total Lifo impact for all of 2008 was about $8mn).

My point was that these "hidden" assets can also create less obvious but significant impacts on the earnings and cash flows of the business that would need to be considered (they are all part and parcel of the same issue.)

For example, in the A.M. Castle situation the use of the Lifo 'reserve' has caused a significant acceleration of the 'buffering' of earnings in Q1 2009. Reported operating income for Q1 2009 was $2mn ($22mn for Q1 of 2008.) Taking into account the Lifo impact, this would have lowered Q1 2009 operating income by $23mn to a ($21mn) operating loss. Remember, this impact was only $8mn for all of the year 2008. This would also have a big negative cash flow impact if/when this inventory is replaced at current market prices.

I'm just pointing out the hidden dangers on and beyond the balance sheet for this kind of "hidden" asset. I agree with you that these types of situations can present hidden opportunities, but your original premise in your post above is very relevant: that companies make accounting choices which can drastically alter the meaning of its financial data that require more than just a scan.

A.M. Castle Teaches a Lesson in Inventory Accounting

Saj, a good find but you also have to keep an eye on a possible hidden downside that allows the company to recognize more earnings simply by dipping into their LIFO inventory "surplus" over the past year, the inventory FMV less LIFO reported inventory (the LIFO "surplus" dropped from $134mn to $111mn from March '08 to '09. This would have increased reported earnings by $23mn just due to "inventory management" rather than increased sales.