Survey finds free cash margin declined for first time in several quarters, as revenue growth remains
By Ronald Fink
US companies’ free cash flow appears to have peaked and may be in for a decline in coming quarters unless their revenues
continue to grow, a survey released today suggests.
The survey of 3,807 non-financial companies
with a market capitalization of at least $50 million found that companies are
still sitting on cash and are unwilling to invest. That in itself threatens
prospects for revenue growth by further starving an already weak economic
The study found that for the twelve months
ended in June 2010, median free cash margin declined to 5.97 percent from 6.69
percent for the twelve months ended March 2010, according to the study by the
Financial Analysis Lab of the Georgia Institute of Technology.
Still, companies are keeping costs firmly in
check. Even as free cash margin declined, their fundamentals continued to
improve. Revenues increased for the second consecutive reporting period and
were accompanied by an improvement in gross margin and a reduction in spending
on SG&A. Receivable days and inventory days remained relatively flat,
though companies took longer to pay vendors, using increased payables days to
boost cash flow. Capital spending
measured as a percent of revenue continued to bounce near recent lows.
But that calls into question prospects for
growth. “Overall, our data give no
obvious signs that companies are beginning to embrace growth,” the authors, led
by Georgia Tech accounting professor Charles Mulford, wrote in a note
accompanying the report. “They are shunning new investments in inventory and
capital equipment and sheltering resources as protection against uncertainty.”
Five industry sectors—materials,
transportation, consumer durables and apparel, household and personal products,
and technology hardware and equipment—reported weaker free cash margin than
they did in the same period in 2009. Four industry sectors—commercial and professional services,
automobiles and components, food and staples retailing, and healthcare
equipment and services—saw improved free cash margin. The remaining eleven sectors
reported free cash margins that were relatively stable.
"Overall, our sample firms continued to
operate in a ‘hunker down’ mode, sheltering resources and shunning new
investments in inventory and capital equipment,” the authors added. “An increase in revenues
notwithstanding, we saw no evidence that firms were beginning to embrace growth
or invest for the future. Instead,
they appeared to be treading water, protecting their cash resources from future
unknowns and waiting for a clearer economic picture to emerge."