Corporate cash flow may have peaked: report

Survey finds free cash margin declined for first time in several quarters, as revenue growth remains fragile.

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 recovery.

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."

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