Thursday, May 10, 2012

Disturbing Cash Flow Trends

Cash generation by a business is of crucial importance.  Regardless of what profit and loss statements present, a business will not flourish--or even ultimately survive--if it doesn't generate sufficient cash for its operations, debt obligations, and to reward its owners.  The statement of cash flows also can be a useful check on the integrity of an enterprise's management.  As we have seen many times over the years, reported earnings can be manipulated by accounting techniques.  It is much more difficult to misrepresent the cash generation of a business.

So I found it disturbing to notice among the various first-quarter reports from companies that for a number of companies, there was a deterioration in the level of cash that was generated.  Or there was a disturbing disparity between reported profits and the amount of cash generated in the quarter.  I have concerns about the reported results of companies such as Coca Cola, CSX, Emerson Electric, DuPort, Caterpillar, Baxter, Nike, Pepsi, and Starbucks.

These concerns add to my caution about the current state of the stock market, though the recent selloff probably will be followed by a rebound.

Steve Lehman

S & P 500:  1355

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