Large-cap Diversified Industrial company 3M was up 3.5% during today's afternoon session. It clearly has investors' attention, and the business is profitable with average operating margins of 21.9%. But is the company cash positive?
We'll need to analyze the company's cash flow statement to find out. One big misconception about accounting, and by extension, investing in corporate equities, is that profits = cash. This is not true. Large corporations calculate revenues and earnings on an accrual basis, meaning that they add up confirmed sales amounts, subtract average costs for the period, and come up with an earnings number.
For example, a sale recorded in Q2 will be included in the Q2 calculation of profits, but the customer payment might not reach the corporate coffers until Q3, when it will be accounted for in the cash flow statement. Because of these delays and other vagueries of accounting, it's even possible for a profitable business to be cash-negative! That's why the overview of a business's cash flow is an essential element of security analysis. Free cash flow consists in the net cash flow from operations, minus its capital expenditures (i.e. investment in the business):
Breakdown of 3M Company's Cash Flow
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 7,454,000,000.0 | -1,603,000,000.0 | 5,851,000,000.0 | -11.51 |
| 2020-12-31 | 8,113,000,000.0 | -1,501,000,000.0 | 6,612,000,000.0 | 23.11 |
| 2019-12-31 | 7,070,000,000.0 | -1,699,000,000.0 | 5,371,000,000.0 | 10.47 |
| 2018-12-31 | 6,439,000,000.0 | -1,577,000,000.0 | 4,862,000,000.0 | n/a |
The coefficient of variability of 3M Company's cashflows is 13.1% and the average growth rate is 7.4. Overall, the company's cash flows exhibit strength and predictability, which shows that the company is effectively converting its profits into cash -- so the investor interest in the stock seems to be warranted!
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