Cash Flow Trends and Their Fundamental Drivers: A Continuing Look Comprehensive Industry Review (Qtr 4, 2008)
Mulford, Charles W.
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This research report is one of a series that looks at the cash flow performance of Corporate America. Our primary focus is on free cash margin, or free cash flow measured as a percent of revenue. We also look at the drivers or components of free cash margin in an effort to determine factors behind observed changes. In the current study we conduct a comprehensive review of 20 four-digit GICS non-financial industries and their 61 six-digit GICS sub-industries for a series of rolling twelve-month periods from the first quarter of 2000 through the fourth quarter of 2008. Recession notwithstanding, due to declining capital expenditures and reduced working capital requirements, free cash margin held up reasonably well during the twelve months ended December 2008. The metric declined to 4.12%, down from a high of 5.14% reached in June 2004, and more recently, the 4.93% level reached in December 2007 and 4.44% in September 2008. With free cash margin at 4.12%, corporate America is generating 4.12 cents of free cash flow for every dollar of revenue generated. The number of industries experiencing declining free cash margin increased from our last report. For our sample as a whole, free cash margin last bottomed at 2.43% during the 2001 recession. We continue to believe that during the current recession, free cash margin will likely decline to levels that are at or below those found in the 2001 recession, suggesting a continuing contraction of free cash flow of 50% or more from current levels. However, a continuing focus on maintaining low working capital levels and reduced capital expenditures may leave companies better off on a cash flow basis than they were in 2001.