The Georgia Tech Financial Analysis Lab conducts unbiased research on issues of financial reporting and analysis. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants.
Because our lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large.
A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times our research may look at stock prices generally, though from a fundamental and not technical point of view.
Cash Flow Trends and Their Fudamental Drivers: Comprehensive Review
Quarter 4, 2013
Free Cash Margin Index:
2.43%, 3.96% (Mar. 2001, Dec. 2008)
4.56% (December 2013)
7.18% (Mar. 2010)
In Q4 2013, median free cash margin decreased to 4.56% for the twelve months ended December 2013, from
4.68% for the twelve months ended September 2013, also down from 4.76% in December 2012. As it has for
much of the time frame studied, except for the 2008 – 2009 recession, free cash margin continues to operate
within a narrow range of between 4.5% and 5.0%.
While we would rather see an improving free cash margin, there are positive developments behind the slight
decrease this quarter. Median revenues increased to $726.07 million, up from $705.28 million for the twelve
months ended September 2013 and down from $788.50 million in the period ending December 2012. The
quarterly rise of 2.95% offers a positive signal in the U.S. economy, against its year-over-year decline of 7.92%.
Along with rising revenues, operating profitability improved, driven higher by improving gross margin and level
SG&A spending. The median cash cycle improved considerably as receivables, inventory and payables days all
contributed. The fourth quarter data promotes an improving economy, but does not yet imply a strong economy.
Looking at individual industries during the December 2013 reporting period, free cash margin was stable in
nineteen industries, increased in eleven and declined in fourteen. Compared to Q3 2013, we are seeing more
individual industries with stable free cash margin. Included in this report is a closer look at two separate
industries: Consumer Goods with increasing free cash margin and Retail with decreasing free cash margin.
Data for this research were provided by Cash Flow Analytics, LLC., www.cashflowanalytics.com.
Charles Mulford is a principal in Cash Flow Analytics, LLC.
Earnings Quality: Reports on Individual Companies
In these reports we examine one or more dimensions of earnings quality: the cash flow support of earnings, the sustainability of earnings, or the quality of the balance sheet.