Mind the Gap in CFO Magazine is very timely article. The article states reasons why the recent upturn in corporate profits is unsustainable. A study of operating cash flows of 87 non-financial companies suggests profits are not sustainable.
The study compared cash flow trends with earnings for large blue-chip companies. A gap between cash flow from operations and operating income existed for companies in the study. The difference between operating cash flow and income last year for the median company in the group was almost 12 percent greater than the average for the three years that ended in 2002.
The concern is that the excessive cash margin of 12% reflects a heavy dependence on improvements in working capital and other types of improvements that will boost cash flow. The article states that “Unless more sustainable growth has materialized in 2003, which at this point is impossible to determine, the study suggests that operating cash flow will soon decline. So, ultimately, will earnings.”
The study compared cash flow trends with earnings for large blue-chip companies. A gap between cash flow from operations and operating income existed for companies in the study. The difference between operating cash flow and income last year for the median company in the group was almost 12 percent greater than the average for the three years that ended in 2002.
The concern is that the excessive cash margin of 12% reflects a heavy dependence on improvements in working capital and other types of improvements that will boost cash flow. The article states that “Unless more sustainable growth has materialized in 2003, which at this point is impossible to determine, the study suggests that operating cash flow will soon decline. So, ultimately, will earnings.”
