>> Well the part about cash flow being backward looking is easy to see.
It's simply a measure of how much cash did we collect last year.
Minus how much cash we paid last year.
Earnings has some backward looking features as well.
But it has a lot of forward looking information embedded in it.
For example.
Depreciation is a function of how long you intend to hold the asset in the future and
what the salvage value will be in the future.
So those future estimates affect the depreciation number.
Any time you book revenue before collecting cash,
you're making a future estimate.
You're trying to estimate how much of this revenue you're going to collect in cash in
the future.
And you make adjustments for allowance for doubtful accounts.
So basically, on the income statement, any time we recognize a revenue or
expense before the cash flow,.
Or any time that we take a cost and
spread it out over time, we're embedding future estimates into the earnings number.
And as a result of this forward-looking aspect,
earnings tends to be a better predictor of future cash flows than current cash flows,
which has been borne out by decades of academic research.
The other problem with cash from operations is
that there's no deductions for the cost associated with capital investment.
So we see in earnings that there's this charge for
depreciation which recognizes the property plant and equipment used this period.
Whereas when you look on a cash basis the cash required for fixed assets shows up as
cash from investing activities, not as part of cash from operations.
And plus there's a mismatch in timing where it only shows up as the cash flow,
obviously when you pay in cash.
But then you may end up using that equipment for
ten years without any future cash flow implications.
But one of the ways we try to get around the fact that cash from
operations doesn't have this deduction for
the cost of capital investment, is look at Free Cash Flow.
So page 27 of the Vulcan report, you can go look it up if you want,
they provide this little chart which shows their free cash flow.
And so we can see they have cash from operations of 202, which we saw before.
They subtract purchases of property, plant, and
equipment from the investing section.
So that's their cost of investment in heavy equipment,
in acquiring land and so forth.
And once you take that out, they still have a positive free cash flow of 116.4.
So, actually they're generating enough cash to cover their investment.