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Centers & Initiatives

Financial Analysis Lab

The Georgia Tech Financial Analysis Lab conducts unbiased research on issues of financial reporting and analysis. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants.

Because our lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large.

A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times our research may look at stock prices generally, though from a fundamental and not technical point of view.

 


Quarter 3, 2016
Free Cash Margin Index:
Recession Lows

0.99%, 3.45% (Dec. 2000, Dec. 2008)

Current

4.96% (Sep. 2016)

Recent High

6.88% (Dec. 2009)

January 2017

Median free cash margin increased to 4.96% for the twelve months ended September 2016, compared with 4.64% for the twelve months ended June 2016 and 3.74% in September 2015. The metric now sits above the upper end of its historical range of between 3.00% and 4.50%. Helping to drive free cash margin higher, operating cushion, or operating profit before depreciation, improved to 13.70% during the twelve months ended September 2016 from 13.64% in 2015. Declines in income taxes and capital expenditures also helped to improve free cash margin.

A notable development during the most recent reporting period was the continued increase in median revenues. The metric increased to $1,052.29 million during the twelve months ended September 2016, up 5.2% from $1,000.30 in 2015, and is nearing its all-time high of $1,066.79 recorded in June 2014.

The cash cycle increased to 50.26 days in the September 2016 reporting period, up from 48.88 days in 2015, driven higher by increases in accounts receivable days and inventory days, offset partially by an increase in accounts payable days. Capital expenditures as a percent of revenue declined slightly, to 3.96% in the period ended September 2016 from 3.97% in 2015. Overall, cash flow data for the twelve months ending with the third quarter of 2016 imply an economy that is improving, but in measured steps.

Looking at individual industries for the reporting period ending September 2016, free cash margin was stable in five industry groups, higher in twelve, and lower in three.

Data for this research were provided by S&P Capital IQ’s Compustat database.


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Quarter 2, 2016
Free Cash Margin Index:
Recession Lows

0.99%, 3.45% (Dec. 2000, Dec. 2008)

Current

4.64% (Jun. 2016)

Recent High

6.88% (Dec. 2009)

Nov 2016

Median free cash margin increased to 4.64% for the twelve months ended June 2016, compared to 4.31% for the twelve months ended March 2016 as well as to 3.69% in June 2015. The metric remains in the middle of its historical range of 3.00% and 5.00%. Helping to drive free cash margin higher, cash operating margin increased from 10.73% in June 2015 to 11.14% in June 2016.

The decline in the topline suggests a slow economy. Median revenues within our sample decreased to $1018.28 million, down slightly from $1031.45 million for the twelve months ended June 2015 but up from $985.91 for the twelve months ended March 2016. Median revenues remain near all-time high levels reached during the period ending June 2014.

Cash cycle is fairly steady as all three components are moving in the same direction and to the same extent largely. Capital expenditures to revenue decreased ever so slightly to 3.93% from the previous quarter at 4.02%. Overall, accounting data for the twelve months ending with the second quarter of 2016 imply an economy that is improving, but in measured steps.Looking at individual industries for the reporting period ending June 2016, free cash margin was stable in three industry groups, higher in twelve, and lower in five.

Data for this research were provided by S&P Capital IQ’s Compustat database.


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Quarter 1, 2016

Free Cash Margin Index:

Recession Lows

1.75%, 4.21% (Dec. 2000, Dec. 2008)

Current

4.33% (Mar. 2016)

Recent High

7.68% (Dec. 2009)

September 2016

Median free cash margin decreased to 4.33% for the twelve months ended March 2016, compared to 4.35% for the twelve months ended December 2015 and up from 3.53% in March 2015. The metric remains in the middle of its historical range of 3.00% and 5.00%. Helping to drive free cash margin lower, operating cushion declined from 13.76% in March 2015 to 13.58% in March 2016, mainly due to increases in selling, general and administrative expenses.

The decline in the topline suggests a slow economy. Median revenues within our sample decreased to $988.31 million, down slightly from $1026.92 million for the twelve months ended March 2015 and $1025.88 for the twelve months ended December 2015. Median revenues remain near all-time high levels reached during the period ending June 2014. Inventory is up slightly to 23.68 revenue days from 23.49 revenue days in March 2015, pushing up the cash cycle. Capital expenditures to revenue increased ever so slightly to 4.03% from the previous quarter at 4.01%. Overall, accounting data for the twelve months ending with the first quarter of 2016 imply an economy that is improving, but in measured steps.Looking at individual industries for the reporting period ending March 2015, free cash margin was stable in three industry groups, higher in nine, and lower in eight.Data for this research were provided by S&P’s Capital IQ’s Compustat database.


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June, 2016

As the U.S. economy continues its slow recovery, 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 here as a positive free cash profile.

The purpose of this study is to analyze the free cash profile of 20 non-financial industries, looking at all firms within those industries that have assets in excess of $100 million. Our goal is to identify those industries that can be expected to generate cash as revenues continue to grow, as well as those industries that will consume cash with growth. We also highlight specific industries to investigate factors underlying their free cash profile.Overall, the median free cash profile for our sample is 3.56%, a modest increase from 2014’s median at 2.66%. There are 10 industries with a positive free cash profile, and 10 industries with a negative free cash profile. Industries with positive free cash profiles enjoy higher operating cushions and are more adept at managing operating working capital and limiting capital spending than industries with negative profiles. It is important to note that although industries have median positive (negative) free cash profiles, a number of companies within those industries may have negative (positive) free cash profiles.


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June, 2016

In a 2008 study, The Potential Consequences of the Elimination of LIFO as a Part of IFRS Convergence, using data for 2007, we looked at the potential effects on net income, the balance sheet and income taxes due of a proposed move away from LIFO. While in that study we were not focused on oil companies, oil firms dominated our sample. We noted at the time that with sizable LIFO reserves, a shift to FIFO would result in significant incremental income taxes.

Oil prices were quite high in 2007 and have declined precipitously since. For this study we are interested in revisiting the LIFO reserve question. That is, do the integrated oil firms still report sizable LIFO reserves? Has the LIFO reserve been eliminated for some firms? What is the effect on 2015 pre-tax income of a decline in the LIFO reserves?For a sample of twelve integrated oil companies that employ the LIFO method we find that the LIFO reserve has declined significantly. For five of the twelve firms, it has declined to zero. Across the entire sample, the LIFO reserve has declined to .91% of total assets at 2015 from 9.44% in 2007. During 2015, the decline in the LIFO reserve had a positive effect on earnings. In an absence of the decline in the LIFO reserve, 2015 pre-tax income would be lower by 15%.Using 2007 data, a shift to FIFO for the integrated oil companies would have resulted in an incremental tax bill of approximately 3.3% of total assets – a significant tax windfall for the federal government. At 2015, that incremental tax bill is all but eliminated, having been reduced to .32% of total assets. While a rise in oil prices will replenish the LIFO reserve once again, at least for now, for the integrated oil companies, the LIFO reserve has been all but eliminated.


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View Past Reports

 

Earnings Quality: Reports on Individual Companies and Industries


In these reports we examine one or more dimensions of earnings quality: the cash flow support of earnings, the sustainability of earnings, or the quality of the balance sheet.

 

Excel Spreadsheets of Cash Flow Data and Graphs by Industry


Quarter 3, 2016