Polaris, a mid-cap Toy company, moved 0.48 during today's afternoon session. The company's business may appear to be profitable at first glance, since its most recent operating margins stand at 9.45%. But there is more to the story.
Investors should review the company's profitability over several years, 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 Polaris's operating profits and cash flows side-by-side to see this process firsthand.
| Date Reported | Revenue (k) | Operating Expenses (k) | Operating Margin | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $8,517,300 | $1,203,400 | 9.45% | 7.75% |
| 2021-12-31 | $8,117,900 | $1,092,700 | 8.77% | 17.25% |
| 2020-12-31 | $6,963,800 | $1,095,100 | 7.48% | 3.74% |
| 2019-12-31 | $6,704,929 | $1,246,000 | 7.21% | -10.88% |
| 2018-12-31 | $6,021,573 | $1,101,200 | 8.09% | n/a |
| Date Reported | Cash Flow from Operations (k) | Capital Expenditures (k) | Free Cash Flow (k) | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $508,600 | $306,600 | $202,000 | 4491.3% |
| 2021-12-31 | $293,700 | $298,300 | -$4,600 | -100.57% |
| 2020-12-31 | $1,018,600 | $213,900 | $804,700 | 99.32% |
| 2019-12-31 | $655,100 | $251,374 | $403,726 | 60.41% |
| 2018-12-31 | $477,100 | $225,414 | $251,686 | n/a |
Polaris's free cash flows have a significantly higher volatility than its margins, with coefficients of variability of 91% and 11% 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 than 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.
