M. Ferrara & Sons - News

As the recent Enron debacle continues to unfold, it has brought up interesting and sometimes tragic issues on an almost daily basis. For those of us who have seen a steady decline in hard manufacturing in the Northeast, it certainly is grist for speculation whether any company out there is as solid financially as it appears to be.

Back before the days of the service economy mentality, most of a company's value resided in the value of their hard assets. Recently even old-line manufacturing companies have tended to look more toward contractors and frequently offshore participation to fill their shelves with goods.

What this means is that more and more of a company's value is tied to more intangible things, such as projected profits, goodwill, and market share. This makes for a more volatile stock valuation, but also one that has made it possible for companies with virtually no fixed assets to produce product and raise capital. In other words, to a large extent it has been a key factor in nurturing the expansion of the 90's.

Rather than focusing on who or what caused the collapse of Enron, perhaps a broader look should be taken at how stable the rest of the economy is in light of how easily a market leading company can take itself out of the game. It seems that companies that can be built up quickly, can evaporate just as quickly. Not only that, but it seems very clear that they have fewer options to exercise when they get in trouble. The lack of hard assets and deep pockets seem to mean that these companies are subject to rapid decomposition. At the very minimum they are far easier to break up and sell off, since they tend to be more portable than most smokestack industries which have kept their hard iron infrastructure.

It is true that the argument can be made that many such companies have succumbed to the inexorable forces of a Global Economy by diversifying or divesting much of their actual manufacturing. There are still a significant number of old technology companies that have yet to be drawn off onto the easy path of lower offshore production costs.

Cash flow simply refers to the flow of cash into and out of a business over a period of time. Watching the cash inflows and outflows is one of an owner's major management tasks. The outflow of cash is measured by those checks you write every month to pay salaries, suppliers and creditors. The inflows are the cash you receive from customers, lenders and investors.

In the final analysis, it's up to the investment community to decide where the true dynamic of valuation is. In the ensuing months, as the Enron fiasco resonates through the economy, it is certain that more and more institutional as well as casual investors will no doubt be revisiting their ideas about what constitutes a solid company and where risk is incurred.