Freedom, a mid-cap Capital Markets company, moved 1.3 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 57.0%. 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 Freedom's operating profits and cash flows side-by-side to see this process firsthand.
| Date Reported | TotalRevenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-03-31 | 564,663 | 161,593 | 57 | 0.25 |
| 2021-03-31 | 352,551 | 78,995 | 56.86 | 68.47 |
| 2020-03-31 | 121,902 | 58,826 | 33.75 | n/a |
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | FreeCashFlow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-03-31 | -347,988 | -9,037 | -357,025 | -163.63 |
| 2021-03-31 | 565,299 | -4,163 | 561,136 | 1315.58 |
| 2020-03-31 | 44,271 | -4,631 | 39,640 | n/a |
Freedom's margins may be growing at an average rate of 19.1%, but its free cash flows are shrinking at an average rate of -22.0%. Operating cash flow is the money coming in from the business, and free cash flow results from the subtraction of capital expenditures, which is just another way of saying "long term investments in the business." These investments are accounted for in the income statement as depreciation expenses.
Understanding the relationship between income and cash flows will help you choose stocks of truly valuable businesses -- not just the ones with creative accountants.
