Howmet Aerospace dropped -3.82% during today's afternoon session, underperforming the S&P 500 by -2.32%. The lackluster performance from the large-cap Aerospace & Defense 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, Howmet Aerospace is profitable because its operating margins have recently averaged 10.62%. 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.
Howmet Aerospace's Operating Margins
| Date Reported | Revenue (k) | Operating Expenses (k) | Operating Margin | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $5,433,000 | $725,000 | 16.92% | 3.23% |
| 2021-12-31 | $4,565,000 | $652,000 | 16.39% | 27.75% |
| 2020-12-31 | $4,881,000 | $768,000 | 12.83% | 207.67% |
| 2019-12-31 | $13,875,000 | $2,507,000 | 4.17% | 49.46% |
| 2018-12-31 | $27,733,000 | $1,315,000 | 2.79% | n/a |
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 Howmet Aerospace's recent cash flows:
| Date Reported | Cash Flow from Operations (k) | Capital Expenditures (k) | Free Cash Flow (k) | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $733,000 | $193,000 | $540,000 | 116.0% |
| 2021-12-31 | $449,000 | $199,000 | $250,000 | 196.9% |
| 2020-12-31 | $9,000 | $267,000 | -$258,000 | -106.4% |
| 2019-12-31 | $461,000 | $586,000 | -$125,000 | 77.31% |
| 2018-12-31 | $217,000 | $768,000 | -$551,000 | n/a |
Howmet Aerospace's free cash flows average out to $-28,800,000.00, but the company has shown last year that it can be cash positive. We also note that the variability of the cash flows is 1489% and their rate of change is 56.76%. In scenarios such as this, we recommend investors to dive deeper into the company's annual and quarterly reports to gain a sense of the qualitative factors that are influencing the numbers.
