Pioneer Drilling’s Earnings Leading You Astray?
Financial documents can be confusing to the average investor, and can sometimes be misleading. Its important to break these items down to clearly understand the situation of the company at hand. Seth Jayson has some questions about Pioneer Drilling’s earnings, and breaks down the need to know info.
Calling all cash flows
When you are trying to buy the market’s best stocks, it’s worth checking up on your companies’ free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That’s what we do with this series. Today, we’re checking in on Pioneer Drilling (AMEX: PDC ) …
Over the past 12 months, Pioneer Drilling burned $37.0 million cash while it booked a net loss of $11.0 million. That means it burned through all its revenue and more. That doesn’t sound so great. FCF is less than net income. Ideally, we’d like to see the opposite. Since a single-company snapshot doesn’t offer much context, it always pays to compare that figure to sector and industry peers and competitors, to see how your business stacks up.
All cash is not equal
Unfortunately, the cash flow statement isn’t immune from nonsense, either. That’s why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don’t appear on the income statement (such as major capital expenditures).
For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it’s ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.
Now that you have some of the gritty details at your fingertips, you can make your own assessment about PDC’s earnings. Following earnings can be helpful in understanding the status of the company. Use this as due diligence and a tip for the future.
Quotes taken from report by Seth Jayson, Read the entire article here.
This is not an offer to buy or sell securities. Oil investment carries with it very high risks. The information contained within this site has not been nor will it be verified by Turn Key Oil and is subject to change at any time. We are not a United States Securities Dealer or Broker or United States Investment Adviser. Do your own due diligence and consult with a licensed professional before making any investment decisions. Please read our full disclaimer before making any decisions.