. . . it’s not clear that the positive trend is sustainable.
A closer look, however, reveals that the news isn’t as cheery as it first appears. Even as cash flow increased, firms’ operating cushion dropped to 14.63 percent of revenue for the year ending in June 2009. That compares to 15.13 percent for the 12 months ending in December of last year. Mulford calculates operating cushion as operating profit less noncash expenses coach outlet cheap oakley sunglasses, like depreciation and amortization.
A sustained recovery will require growth in companies’ top and bottom lines. To get there, many companies will need greater pricing power than they enjoy right now cheap oakley sunglasses, as well as an uptick in sales. A healthy level of capital investment also will be key to a recovery, Mulford adds.
The lower operating cushion means that the growth in free cash flow wasn’t a result of profits improving. Instead, it came about largely through cuts in inventory and capital spending.
For the quarter ended in June 2009, free cash flow at approximately 3,500 publicly held North American companies stood at 4.76 percent of revenue, up from 4.60 percent in March. That’s according to an analysis by Charles Mulford, professor of accounting and director of the Georgia Tech Financial Analysis Lab, Atlanta. Mulford has been measuring free cash flow cheap oakley sunglasses, or the percent of revenue that’s available to shareholders, for several quarters. His analysis covers companies with market caps of at least $50 million, other than those in the financial sector.
Free cash flow for this group has risen steadily since December 2008, when it had sunk to 4.12 percent of revenue. “We’ve seen continuous improvement in companies’ ability to generate free cash flow,” Mulford says.
If operating profit doesn’t improve, companies’ free cash flow is likely to drop again. That’s bad news for everyone affected by the economy (or, pretty much everyone). “Confirmation of the end of the recession on a cash flow basis will require an improving cash margin driven more by improving profitability … and less through reductions in capital spending and the cash cycle,” Mulford writes in the report. ###
That’s not all bad coach outlet, of course. Improved efficiencies in the supply chain and more effective working capital management, along with the move to just-in-time inventory management at many companies, all are positive trends. Similarly, putting off capital investment has allowed companies to hang onto cash when most other financing sources dried up. “But you can only wring efficiencies from the system for so long,” Mulford says.
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