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NEW YORK (Dow Jones)--Memo to Comcast Corp. (CMCSA): Operating cash flow is not spelled E-B-I-T-D-A.
Investors love operating cash flow these days. They see it as a better gauge of a company's performance than net income, and harder to tinker with, so they're paying more attention to it.
That makes it a matter of concern when a company takes something else and tries to call it operating cash flow, as Comcast does.
Last month, Comcast reported $8.5 billion in operating cash flow for 2005. The cable-TV giant said that metric was "the primary basis used to measure the operational strength and performance of our businesses."
The problem is that $8.5 billion doesn't represent real operating cash flow, the way it's calculated under generally accepted accounting principles. Most investors think of operating cash flow in the GAAP way, the way you see it on the cash-flow statement - i.e., net income excluding non-cash items and factoring in changes in working-capital items like receivables and payables. For Comcast, the GAAP cash-flow figure - which Comcast calls by its formal name of "net cash provided by operating activities" - was only $4.9 billion last year.
Why the difference? Because Comcast calculates its operating cash flow by starting with revenue and subtracting operating costs and selling, general and administrative expenses. That's it. None of Comcast's other expenses affect its operating cash flow, even if they're cash expenses. Forget about, say, the $1.8 billion in cash that Comcast spent in interest payments on its debt last year - to Comcast, that doesn't hurt operating cash flow, even though it's part of GAAP operating cash flow.
Most other people would think of Comcast's "operating cash flow" as EBITDA, earnings before interest, taxes, depreciation and amortization, the four expenses that make up virtually all of the difference between Comcast's cash-flow figure and its net income.
Comcast isn't doing anything illegal by measuring its operating cash flow this way. As it's required to, it does disclose its definition of operating cash flow, and it notes that the figure isn't a GAAP measurement, and it reconciles its figure to the GAAP figure - albeit far down in the financial tables of its earnings press release.
But the company's use of "operating cash flow" to describe a different metric is misleading, and risks confusing investors. It also muddies the waters if you're trying to value the company based on its cash flow: If you use the $4.9 billion GAAP cash-flow figure, Comcast is trading at more than 11 times last year's cash flow. But if you use Comcast's $8.5 billion figure, it's trading at less than seven times cash flow. Quite a difference.
"I think it's disingenuous to call that operating cash flow," said Charles Mulford, a Georgia Institute of Technology accounting professor and co-author of the book "Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance."
Comcast said in a statement that its earnings releases "prominently provide clear and consistent definitions for financial measures" and that it has been recognized for "high-quality financial disclosure and shareholder service."
To be sure, Comcast isn't alone. Other companies, particularly some of Comcast's cable-industry competitors, have tried to pass off EBITDA as a valid measure of cash flow. Comcast also isn't doing anything new; it's generally used this definition of operating cash flow for at least the past few years.
But it's particularly annoying now, since investors are paying a lot more attention to cash flow than they used to, and since corporate disclosure is supposed to be clearer in the wake of the rules that regulators passed after the Sarbanes-Oxley corporate-reform law. And it's especially annoying for Comcast, since its sheer size means there's a gap - no pun intended - of billions of dollars between what they say operating cash flow is and what GAAP says it is.
As noted, Comcast paid $1.8 billion in cash interest last year (about $1.65 billion after interest income is factored in and subsidiaries' preferred dividends are taken out). That's the biggest piece of the difference between the company's operating cash flow, which doesn't include that expense, and GAAP operating cash flow, which does. Similarly, Comcast paid $653 million in cash for income taxes - not included in its cash-flow measure, but included in the GAAP measure.
Comcast's GAAP cash flow for 2005 was held down by a special situation: about $1 billion in cash payments for liabilities related to its 2002 purchase of AT&T Broadband. (The company had $515 million in similar payments in 2004.) But even if those payments are stripped out, that would bring GAAP operating cash flow for the year to only $5.9 billion, still well below Comcast's $8.5 billion measurement.
Of course, Comcast can't really call its measurement "EBITDA" either. Ever since the Securities and Exchange Commission changed disclosure rules in the wake of Sarbanes-Oxley, it's frowned on companies using that term; the SEC has said they "must meet the burden of demonstrating the usefulness of any measure that excludes recurring items." Like, say, interest and taxes.
Still, that doesn't make it right for Comcast to appropriate the name of another metric for its own purposes. EBITDA isn't operating cash flow, and Comcast shouldn't try to make it seem like it is.
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