Investors, however, are likely to see through these changes. The company's turnaround is striking, but many of the changes are listed in the annual report, the depreciation change in particular. The listing of that change on the statements was undoubtedly mandated by law, but the other changes were buried a little bit more. However, the investment community can reasonably determine that increasing payables is a sign of the company remaining in a precarious position, as is the deferral of pension obligations.
3. The company's future prospects are reasonable. They have a strong customer base and for the most part the restructuring effort was successful. The acquisition of new capital may have served a useful short-term purpose on the balance sheet, but it also allows Harnischfeger greater financial flexibility. The company's immediate future is no longer in doubt.
However, the picture the company paints of its future is not entirely accurate. There are a couple of red flags that have been identified. The first is the pension deferral and the increase in payables. The deferral of these obligations benefited the company in the short run but they will ultimately need to pay these debts. This will hurt profits at a future point. Perhaps the company is awaiting new financing in order to help shore up these liabilities, or they may be waiting for a rebound in operating cash flow.
The deterioration of operating cash flow is the other major red flag. The firm's dramatic profit turnaround and claims of operating improvements are not supported by improvements in operating cash flow. 1984 was much worse than 1983 and was even worse than 1982 in terms of cash flow from operations. This indicates that the firm's businesses are...
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