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Description of Merriam Report Signals and Indicators
Dual-Cash Flow Signals: The Merriam Report generates two separate dual-cash flow signals. The "Recent" signal
displays changes in operating cash-flow (OCF) for the latest quarter. The "Confirmed" signal displays the overall trend in OCF
over seven consecutive periods.
Recent Bearish - Dual cash-flow in latest qtr. < previous qtr.
Recent Bullish - Dual cash-flow in latest qtr. > previous qtr.
Confirmed Bearish - Dual cash-flow in latest qtr. <= several previous qtrs.
Confirmed Bullish - Dual cash-flow in latest qtr. >= several previous qtrs.
Accrual Ratio: This indicator reveals changes in non-cash activity included in the earnings statement. The accrual ratio helps
to identify the effect of changes in depreciation on long-lived assets, changes in working capital, capital expenditures, etc, for the
cash used in or by operating and investment activities. Generally, a reading of + 5 or greater is quite bearish and a sell signal. In
contrast, a reading of - 5 or less is very bullish and a buy signal.
Capital Productivity Ratios: Bullish or Bearish indicators reveal changes in capital productivity for income producing
assets in the latest period against the average of all periods reviewed.
Revenue Metrics: This compares key expense items and accounts payable as a percentage of sales in the recent period to
the average of all periods. Also with Bullish or Bearish indicators.
Goodwill (Intangible Assets): Graphic interpretations of the changes in Goodwill as a % of Total Assets and as a % of
Total Stockholder Equity. Each graph includes exponential trend lines
|Click any image to enlarge
|Putting it all together
Tips and pointers to maximize your Merriam Report experience.
Financial statements are a history lesson of a company's business operations within a specific period of time.
The income and cash flow statements are very important, but the data is static and exclusive to the period
In contrast, the balance-sheet provides a more substantial and forward view of how a company is valuing its
assets and liabilities.
With the Merriam Report, investors get a clear picture of the important changes within these "relationships"
over multiple periods of time. We believe this provides an accurate view of earnings quality while also offering
predictive analysis capability of a company's prospects going forward.
Stocks exhibiting favorable upside potential:
- Bullish confirmed and recent dual cash-flow signals*
- Improving OCF and declining BSCF trends
- An accrual ratio of -5 or less
- Improving revenue metrics and capital productivity ratios
- Declining goodwill trends
- A stock price that does not yet reflect improving fundamentals
Stocks exhibiting likely downside potential:
- Bearish confirmed and recent dual cash-flow signals*
- Improving BSCF and declining OCF trends
- An accrual ratio of +5 or greater
- Deteriorating revenue metrics and capital productivity ratios
- Increased goodwill and intangible assets
- A stock price that does not yet reflect deteriorating fundamentals
The written summary portion of the MR will highlight those areas of the data we believe to be important, but readers are encouraged
to review the data (especially on page one) and take full advantage of the MR's rich content.
Stocks displaying mixed signals
One of the unique aspects of the MR is its ability to detect potential shifts in a company's financial situation much sooner than
traditional analysis will. Every industry experiences fluctuations in their business cycles differently, but the MR will help investors
identify which way the wind is blowing. Keep in mind however, that one quarter or period does not make a trend.
Recent Bearish & Confirmed Bullish: A possible indication of deteriorating earnings quality in the most recent period.
Look to see if the recent signal is verified by an accrual ratio turning positive (+) or heading that direction. Compare this to
changes in revenue metrics and capital productivity. Are these declining also?
Recent Bullish & Confirmed Bearish: A possible indication of improving earnings quality. Look to see if the recent signal is
verified by an accrual ratio turning negative (-) or heading that direction. Compare to changes in revenue metrics and capital
productivity. Are these improving?
|* Companies with the best upside potential will
display positive OCF and negative BSCF. Companies
with the most likely downside potential generally show
positive BSCF and negative OCF
Other Considerations and Suggestions
1) Generally, companies with higher earnings quality will display rising levels of positive (+) operating cash-flows (OCF) and declining
levels of balance-sheet cash-flow (BSCF). The bullish dual cash-flow trends should also be validated by bullish trends in the accrual
ratios discussed earlier.
In contrast, companies with deteriorating earnings quality typically have declining OCF and rising BSCF. These bearish trends will
often be validated with a corresponding bearish trend in the accrual ratio.
2) The MR is an excellent comparison tool when comparing companies in similar businesses, industries and sectors. It is not
recommended to compare MR analysis between companies in different industry groups or sectors.
Example: The data signals and indicators generated for a Coca Cola will likely be significantly different than those for a chemical, technology or steel
company, etc. This can be for many reasons such as the capital intensity of the business, debt loads, etc.
3) Always review the balance-sheet data on page one of the MR for signs of unusual changes in the relationship of assets. Things
to look for include treatment of: receivables, days-sales-outstanding, inventory (incl. their relationship to sales), P/P&E (capacity),
accounts payable, etc. Compare these to changes in revenue. This is particularly true with companies experiencing transitional
For example: a build-up of inventory in advance of a new product launch is not unusual. But, if the ramp-up or sales don’t go as planned, the
company might be forced to carry the higher inventory longer than expected. –Look for rising inventory as a % of sales.
Or, a company’s new product launch appears to be going well. Sales are rising, but accounts receivable are rising at a faster clip than revenues.
–Look for an increase in days-sales-outstanding.
4) Anytime you see a noticeable shift in revenues accompanied by an abrupt change in the balance-sheet items, it makes good
sense to peruse the footnotes and see if management has provided a reasonable explanation for the changes.
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