The Free Cash Profile: Insight into the Cash Flow Implications of Growth - An Analysis Using 2010 Data
Mulford, Charles W.
Karnes, Chad M.
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With the end of the U.S. recession, companies are once again enjoying renewed, if limited, revenue growth. In terms of cash flow generation, as revenues grow, there are certain industries and companies that will benefit more than others. It is a common misbelief that growth requires a use of cash. The reality is that there are many companies that actually generate increasing amounts of free cash flow as revenues grow. These companies have what we refer to as a positive Free Cash Profile. The purpose of this study is to analyze the Free Cash Profile of forty-four non-financial industries and all firms within those industries with revenues in excess of $100 million. Our goal is to identify those industries that should generate cash as revenues continue to grow as well as those industries that will consume cash as growth resumes. We also identify companies within the industries driving those trends with the intent of identifying those companies that will benefit most with revenue growth. Overall, the median Free Cash Profile for our sample is 4.95%. However, eighteen industries, or forty percent of our sample, have a negative Free Cash Profile. However, even in these industries, there are numerous firms with positive profiles. The firms with positive Free Cash Profiles enjoy higher operating cushions and are more adept at managing operating working capital and limiting capital spending than firms with negative Profiles.