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Fire Your Stock Analyst!: Analyzing Stocks on Your Own by Harry Domash

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Step 9: Red Flags

Value investors don’t have to look for red flags pointing to future disaster, because usually the disaster has already happened. However, there is still one earnings quality issue that should be assessed.

Capital Expenses vs. Depreciation

Smart managers know that they must continue to invest in new capital equipment, even when times are tough. Generally, capital expenditures should at least equal depreciation charges. Table 16-15 shows ATI’s record on that score.

Table 16-15. ATI’s depreciation and capital expenses (in millions). The February 2001 and November 2000 column represents the first two quarters of fiscal 2001.
 11/00 & 2/01FY 8/00FY 8/99FY 8/98FY 8/97
Depreciation10181474
Capital Expend1526312222

The data shows that ...

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