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Cash flow poised to jump 22 percent in 2010 Print E-mail
Wednesday, 02 December 2009

By Marine Cole

A heightened focus on cash management during the recession could pay off next year with a 22 percent increase in free cash flow levels, according to a Fitch Ratings study released Wednesday.

The increase will be a reversal from a 21 percent decline in 2008 and a 13 percent decline in 2009.

"The 2010 growth will be the result of continued lower capital expenditure, increased operational efficiency, and some higher expectations by companies for revenue recovery in 2010," according to the report.

Capital expenditure rose by 5.9 percent in 2008, but will fall by 9.9 percent in 2009 and 1 percent in 2010, which isn't too surprising, Fitch said, considering falling demand for products and services in the current environment.

"Generally, excess free cash flow has been used to increase cash balances and/or repay debt," according to the report. "As a result, levels of capital expenditure, free cash flow, and balance sheet cash have changed materially over the past several years and will continue to change in the future."

But Fitch, which reviewed financials for 312 companies, also noted that these free cash flow and capital expenditure figures are aggregate numbers and can be influenced by a small number of companies.

By measuring capital expenditure intensity as capex divided by revenue, Fitch found that capital expenditure intensity stood at 5.5 percent in both 2007 and 2008 and will remain steady at 5.4 percent in 2009.

"This would indicate that companies responded with great efficiency in reducing capital expenditure to match demand in 2009," it said. The intensity figure will fall to 5.2 percent in 2010, Fitch predicted.

The aggregate results for free cash flow are also heavily influenced by a small number of companies, most specifically by those in the energy sector.

Fitch also looked at the cash flow conversion rate, which fell from 4.1 percent in 2007 to 3 percent in 2008 and about 2.9 percent in 2009. Fitch anticipates it will recover to 3.4 percent in 2010.

"The steep decline of the conversion rate in 2008 and its stabilization in 2009 reflects a modest reduction in capital expenditure, but more importantly increasing margins from ongoing operational efficiencies," Fitch said.

As to balance sheet cash, on an aggregate level and after adjusting for large acquisitions, it rose by about 2.8 percent in 2009. Adjusted for large cash usage by ExxonMobil on exploration expenses and affiliate investments, the growth rate increases to about 5 percent or nearly $21 billion.

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