What makes Guttridge Capital Management’s guidance and research unique? At GCM, we address two basic issues most analysts overlook.
- All financial statements are not comparable! Some reflect flows while others are cumulative.
- Trends in financial data can’t be analyzed without knowing the distribution of the data! We have the expertise to parse financial data, to uncover value and to identify pitfalls that should be avoided.
Each of a company’s three primary financial statements (income statement, balance sheet and statement of cash flows) provide GCM unique insights to help guide GCM’s investment decisions. Making an investment decision on a company’s stock relying on only one or two of these three critical statements is risky and misses critical information.
In reality, most practitioners rely on the income statement and the statement of cash flows, because both are periodic, having specific start and end dates and then are “reset” to zero. As a result, the data is comparable as long as both statements reference the same period. This review allows analysts to easily spot trends in the business BUT this is problematic. This standard approach doesn’t result in the type of holistic understanding of the distribution of data that GCM provides. The traditional approach simply doesn’t reveal the probability that a particular trend is sustainable.
As a company’s balance sheet is cumulative over a company’s lifetime, it’s a picture of the business as a historic whole, not a complete reflection on “today.” The challenge is that many analysts treat the balance sheet as a static repository of all company actions. This leaves out critical information uncovered GCM by treating all the financial statements as a flow and studying there changes overtime.
Guttridge Capital has developed a unique methodology that specifically makes the income statement data and changes in the balance sheet readily comparable. These modifications allow us to analyze the operational history of the business statistically, and generate a distribution of sustainable cash flows the business has produced. The distribution then allows us to use the current stock price as an input to the analysis, comparing the market price to the cash flow per share that the company is likely to generate over time. This process indicates when an operational trend, viewed by the market as being sustainable, is likely to revert back closer to its historical average.