The slow demise at General Motors reminds us yet again why the statement of cash flow is the superior analytical tool for defensive-minded investors than the income statement.
During the 19 years ending 2004, GM made money on an accrual (GAAP) basis every year except three years in the early '90s (source: Reuters). Total profits during these two decades: $33 billion.
But on a free cash flow basis, GM was the pits. It lost money in 1986, 1987, 1989, 1990, 1994, 1995, 1997, 1998, 1999, 2000, 2001, 2002, 2003, and 2004. Total red ink: $138 billion. For our purposes, free cash flow is operating cash flow minus investing cash flow.
Due to these cash losses, GM's book value (corporate net worth) is $4 billion less than in 1986. Ouch |
