Comments on: Lunchtime Links 1-19 Option ARMageddon Tue, 14 Oct 2014 13:06:34 +0000 hourly 1 By: Rolfe Winkler Wed, 20 Jan 2010 23:04:49 +0000 No, Ron, they didn’t. It happens for balance sheet periods beginning on 1/1/10. So the Q1 release will be the first to include it.

By: Ron Wed, 20 Jan 2010 23:02:34 +0000 Rolfe, did Citi bring their off balance sheet liabilities onto their books with this latest statement?

By: DP Tue, 19 Jan 2010 22:47:20 +0000 The Bloomberg piece alleging that stocks are cheap based on multiples of cash flow is a ridiculous argument. Many companies are reporting higher free cash flow despite huge declines in sales and earnings because (a) working capital is a source of cash flow as the business shrinks and (b) capital expenditures are slashed due to a lack of attractive investment opportunities. Neither of these is a good thing. By those criteria, the best way to boost cash flow is to liquidate the business.

Alcoa is one of the companies cited in the article for improvement in cash flow. In Q4 2009 it generated $761 million in free cash flow for the quarter. We’re supposed to be impressed by that. But Alcoa generated $1.302 billion in cash from reduced working capital (A/R + inventories – A/P), $395 million by cutting the cash contribution to its pension fund versus prior year, and $1.796 billion by cutting capex in half versus prior year. Those items add up to $3.493 billion in cash improvement versus the $761 million of free cash flow.

So in terms of cash from operations excluding changes in working capital, Alcoa actually had negative cash flow of $2.732 billion in Q4 09 versus Q4 08.

The improvements in working capital were solely a function of declining sales. Alcoa’s sales dropped 31.8% but its A/R was down only 18.8% inventories were down 28.1%. So despite generating cash from working capital, days of sales outstanding in inventory and A/R went up during the quarter.

The story will be similar for Caterpillar, another company cited in the Bloomberg piece, and for many other companies. To suggest investors should put the same kind of multiple on cash generated by liquidating part of the business as they should on actual cash profits is absurd.