Charles Mulford, director of Georgia Tech's Financial Analysis Lab
According to a recent report from Georgia Tech College of Management's Financial Analysis Lab, companies in America maintained their free cash margin, a good indicator of financial health, relatively well in 2008.
While their profitability continues to suffer, companies have held up their free cash margin by reducing working capital requirements and capital expenditures, says accounting professor Charles Mulford, director of the Financial Analysis Lab.
"But we believe that during the current recession, free cash margin will likely decline to levels that are at or below those found in the shallower 2001 recession," Mulford says. "However, a continuing focus on maintaining low working capital levels and reduced capital expenditures may leave companies better off than they were in 2001, though lower capital spending now could hurt free cash flow later."
As a predictor of long-term financial health, free cash margin is significant because it's the percentage of revenue available to shareholders in the form of discretionary cash flow after all other claims have been accounted for, Mulford explains. "It's particularly relevant during a recession," he adds.
While free cash margin bottomed out at 2.43 percent during the 2001 recession, its aggregate level in non-financial industries stood at 4.12 percent at the end of 2008, down from a high of 5.14 percent reached in June 2004. It had averaged about 4.5 percent since 2002 before beginning to slip in the last several quarters measured. It was 4.44 percent in September 2008.
In their study, Mulford and his research assistants conducted a comprehensive review of every non-financial industry from the first quarter of 2000 through the fourth quarter of 2008, looking at 3,400 companies with market capitalization of at least $50 million each.
Two industries, utilities and food/staples retailers (such as Wal-Mart and Sysco Corp.), saw their free-cash margin rise in 2008, thanks to reductions in working capital and capital expenditures. Six other industries remained stable while 12 declined, four more than the previous year.
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