Cock-a-hoop about Cochlear

Been running the ruler over Cochlear as it appears to have been shunned by investors. Not exactly sure why. But the share price has fallen though the floor in recent times.

Sure there have been some downside surprises on the earnings front, but a lot of the negativity comes from the product recall which is now in the rear view mirror!
Due to my CFA Exam 2 studies, I have been focusing on quality of earnings, specifically the Balance Sheet Accruals ratio. This gives you some insight into how much of the earnings are cash vs how much is accruals. Cash earnings are a lot more robust and sustainable than Accruals.

It involves calculating the change in the Net Operating assets over the years (also known as Aggregate Accruals) and then dividing that number by the Average Net operating assets over the years.

Using the annual reports, I have the following figures for Cochlear

2009-2010 - BS Accruals ratio = 15.5%
2010 - 2011 - BS Accruals ratio = 15%
2011 - 2012 - BS Accruals ratio = -22%!!!

Now a negative Accruals ratio is a good thing. It means that the Financial reporting is extremely conservative in regards to accruals (focusing more on cash earnings)

So there was an element of "taking out the trash" in the latest financial report. That is why I believe that earnings next year for Cochlear will probably surprise on the upside as the accruals ratio becomes positive.

 Note: This is not financial advise or a recommendation to invest, not invest in Cochlear. Please consult a financial advisor for all investment decisions.