BHP dropped -3.5% during today's afternoon session, underperforming the S&P 500 by -3.0%. The lackluster performance from the large-cap Industrial Metals & Mining company may seem like an opportunity to buy shares at a discount, but it's a good idea to take a closer look at the company's financials first.
At first glance, BHP is profitable because its operating margins have recently averaged 43.0%. This represents the percentage of profit after all operating costs have been accounted for, and if you're thinking that these profits neatly translate into cash, and therefore, equity growth, you'd be mistaken. This is because profits are not cash.
When a company makes a sale, its accountants record it as revenue -- even if the company hasn't gotten paid yet. Corporate accountants use the accrual method (as opposed to the cash method) to paint a representative picture of how much money the company is collecting and spending on average in each reporting period. So these income and expense numbers for a given period never match the incoming and outgoing cash flows during the same period.
This means that a company can be profitable in a given year, yet post a negative cash flow from operations. Some profitable companies may struggle to reliably convert their profits into the cash needed to run the daily business, to service its debt, and to pay its equity investors. That's why its essential to review the company's cash flows in tandem with its profit margins. Below is an overview of BHP's recent cash flows:
|Cash Flow from Operations ($)
|Capital expenditures ($)
|Free Cash Flow ($)
|YoY Growth (%)
BHP's cash flows are on average positive, and have a solid aveerage growth rate of 45%, but their high coefficient of variability, which stands at 47.8%, may be cause for concern more cautious investors.