For those of you interested in investing in capital markets, research just became a whole lot more complicated.

Merrill Lynch, under current intense scrutiny because of their research analysts misleading and manipulative investment advice upon which investors relied upon, has agreed to settle the investigation by Eliot Spitzer, the attorney for the State of New York, and the US SEC out of court, for $100 million.

Speculation is that this is just the start of an entire investment industry overhaul (long overdue) that may net a settlement fund in excess of $50 billion. Having said that, there are many competent analysts working for firms that have no ties to investment banks; perhaps, in the future, we shall see more analysts forming completely independent firms focused on providing unbiased objective advice to the investing public.

After overcoming that hurdle, that of which analysts to rely upon, if you are interested in a specific company, you really must look at their financials.

While it is great to buy on emotion, chat-room trading talk, and the advice of friends on 'hot' stock tips, numbers don't lie. I once had a boss who would start yelling whenever complicated accounting methodology came up, "I am convinced it is all smoke and mirrors!" he would say. He and his brother ran a real estate development and construction company. Of course, it was said in total frustration because no matter how you cut it, construction accounting is complicated and long-tailed (lasting more than one year before you show a profit).

Insurance accounting is extremely long-tailed when you consider a company that may insure worker's compensation for asbestos, for instance. Reserves may be carried as restricted funds on the books for more than forty years!

As I have mentioned in other columns, most large businesses, particularly public companies, conduct business and report results of operations using the accrual basis of accounting. What does that mean to you? Simply, put the bottom line, may not be the bottom line where cash is concerned. Beginning investors may make the mistake of thinking that net income on a profit and loss statement is the cash that the company has on hand, currently. Nothing could be farther from the truth.

We will visit the financial statements of Ace Development Inc., a real estate and construction company. Ace Development Inc. has projects everywhere in all stages of progress, some just barely started, some almost finished, most of them massive buildings, such as an entire shopping mall complex.

Ace Development can only record profits on projects that are finished, so much of the revenue billed out and expenses due to paid or actually paid, are transferred as work in process or deferred revenue and sit on the balance sheet until the project is over.

Typically, construction companies have to 'front money' to get the development going, before they start to see any cash payments from the new owners. All of this becomes rather complex and tedious when it comes to recognizing what the real profit margin will be, particularly if the cost estimator comes in with inaccurate numbers or the project runs over schedule. What becomes very apparent, and very real, in short order is just how much cash the company really has to meet operating expenses every day, until the big pay-day, when the shopping mall is done and totally paid for.

The following chart demonstrates the difference between net income the bottom line and the amount of 'real' cash that the company actually had in the bank at the end the year 2000. Now, I know the accountants out there will say that the accounts receivable on the balance sheet is not the same as the changes in accounts receivable on the Statement of Cash Flows. Yes, that is true, but I know something that you don't, which is that almost always financial statements are issued for two comparative years, so that you can compare the increase/decrease in receivables, liabilities, deferred revenue, work-in-process from year. The real truth is that while Ace Development Inc. recognized $80 million in profit, it in on the accrual basis reporting; the real amount of cash in the bank is only $10 million. Will this company need a cash infusion, or another line of credit? It all depends. If many projects are almost finished, then large amounts of cash will be in soon; but if the reverse is the cash, Ace Dev. CEO may be going to the bank, hat in hand, trying to arrange another credit line. Since taking this further transcends into complex accounting issues, we will leave it for the day.

This same concept can be applied to any company stock that you are interested in. Watch the real cash that the company has in hand, because if it is low, and they haven't made a profit at all technology companies are typical of this problem then, the company fortune is headed downward. And short of new bank financing or a sudden very large profit, it is only a matter of time, sometimes only a few months, before they may be out of business.

You can look up any publicly traded company's financials by going to any financial website and typing in the stock quote, then drilling down to the company webpage. Try starting with a good solid cash-rich company, such as AIG. It won't take you long to find out that the numbers start to make sense. As I said, numbers don't lie.

Martha Harris Myron CPA CFP is a Bermudian, a Certified Financial Planner(US license) practitioner and Manager, Financial Planning department, Bank of Bermuda. She holds a NASD Series 7 license, is a former US tax practitioner, and is the winner 2001-The Bermudian Magazine - Best of Bermuda Gold Award for Investment Advice. Confidential Email can be directed to marthamyronnorthrock.bm The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.