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August 8, 2022

Financials Matter

"It's Not Just About Finance"

The Truth Behind Financial Engineering

When you hear the term “Financial Engineering” your radar should be blasting.

It’s another Wall Street “smoke and mirrors” trick.

And one of the most obvious ways it’s used is when a company reports their earnings.

A recent example is Caterpillar’s (CAT) latest earnings report that had the street going crazy and the stock reaching an ALL TIME HIGH.

Compared to last year, CAT’s earnings were up 1%.

Doesn’t that excite you?

What the report doesn’t tell you is that CAT previously had 51 Consecutive months (That’s almost 4 ¼ years) of declining earnings.

How does a company lose money every month for over four years and still reach an all-time high?

It’s simple…smoke and mirrors financial engineering.

During those 51 losing months, CAT aggressive did what many companies have been doing since 2008.

They borrowed lots of money (at near 0%).  But instead of using that money for capital improvements or expanding their business, they used it to buy back their own stock.

A couple of things happen when a company “buys back” their own stock.

  • The number of shares are reduced
  • Less shares outstanding = better earnings per share (EPS)
  • Executive pay goes up because they’ve improved their EPS

 

What a joke!

The big wigs give themselves a FAT BONUS while their company continues to have declining sales and earnings for years.

And the guru/analysts jump for joy and tell you to buy, buy, buy.

Don’t be a victim of “Financial Engineering.”

In the September issue of Simplifying Wall Street in Plain English, we’ll list companies that use these tactics.  And you’ll be surprised at some of the names.

Get your copy (HERE).

James

P.S.  When companies stop buying back their shares, what happens to their stock?  Find out (HERE).

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