Equinor ASA, a large-cap Oil & Gas Integrated company, moved -1.3 during today's morning session. The company's business is fundamentally profitable, as its average operating margins stand at 20.0%. But a profitable business does not always translate into value creation for the company's equity investors.
Investors should review the company's profitability, and also its ability to convert these profits into hard cash. Some profitable companies struggle in this respect. For example, an unexpected increase in capital expenditures, or an inability to collect payments from customers can quickly empty a company's coffers despite healthy profits on paper. Let's compare Equinor ASA's operating profits and cash flows side-by-side to see this process firsthand.
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 88,744,000,000.0 | 56,557,000,000.0 | 36.27 | 856.99 |
| 2020-12-31 | 45,753,000,000.0 | 44,019,000,000.0 | 3.79 | -77.75 |
| 2020-01-01 | 62,911,000,000.0 | 52,199,000,000.0 | 17.03 | -25.83 |
| 2018-12-31 | 78,556,000,000.0 | 60,522,000,000.0 | 22.96 | n/a |
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 28,816,000,000.0 | -8,040,000,000.0 | 20,776,000,000.0 | 987.75 |
| 2020-12-31 | 10,386,000,000.0 | -8,476,000,000.0 | 1,910,000,000.0 | -46.12 |
| 2020-01-01 | 13,749,000,000.0 | -10,204,000,000.0 | 3,545,000,000.0 | -57.43 |
| 2018-12-31 | 19,694,000,000.0 | -11,367,000,000.0 | 8,327,000,000.0 | n/a |
Equinor ASA's free cash flows have a significantly higher volatility than its margins, with coefficients of variability of 98.8% and 67.4% respectively. Free cash flow is calculated by subtracting capital expenditures from operating cash flow. Operating cash flow is the net cash flowing in from business activities, while capital expenditures are long term investments in the business.
Capital expenditures have an effect on operating margins because they are depreciated as an expense in each accounting period's earning statement. So if cash flows are much more variable then margins, the company is likely using accounting methods that make its margins appear more stable than they might otherwise be. Or the business may be not be predictably converting sales profits into cash.
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