WSJ -- Free-Cash Flow Falls at Big Companies ...................................................................
May 28, 2013, 1:31 AM ET
Free-Cash Flow Falls at Big Companies
By Vipal Monga
The Big Number : $565 Billion
That’s the amount of free-cash flow recorded for 2012 by 1,000 of the largest U.S. public companies.
Companies have less cash available for debt reduction, acquisitions, innovation programs and dividend payments this year, says Dan Ginsberg, associate principal at REL Consultancy.
The amount of free-cash flow recorded by 1,000 of the largest public companies in the U.S. by revenue fell to $565 billion for 2012, down 14% from 2011, according to REL, a division of Hackett Group. Free-cash flow measures the cash that companies have after they have paid off all their expenses. The decline recorded between 2011 and 2012 is the first since 2007.
“It’s very significant,” says Mr. Ginsberg. He says last year’s drop coincided with a decline in free-cash-flow margins -- which measure free-cash flow as a percentage of companies’ revenue -- to 5% in 2012 from 6% in 2011.
That means companies became less efficient in converting their revenues into cash in 2012, reversing a trend that began in 2009, when businesses hit by the recession began to get more efficient as revenues fell.
Prathima Iddamsetty, a senior manager at REL, says that companies have replaced some of their free-cash flow with debt, which rose 10% for the 1,000 companies examined to $3.98 trillion in 2012. Much of that increase has to do with friendly debt markets.
“For companies, it takes effort to generate cash from operations. It’s harder to do so than borrow from the debt markets,” Ms. Iddamsetty says. “We believe there’s a correlation.”
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