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CashFlow Profile Formula

1) Charles Mulford developed the Cash Flow Growth Profile framework to systematically analyze corporate cash flows. It breaks down free cash flow into EBITDA margin, operating working capital, capex, and taxes as a percentage of revenue. 2) The author analyzed UK-listed shares using this framework and found that companies with stronger Cash Flow Growth Profiles outperformed those with weaker profiles over two years. 3) Many of the top 25 companies had healthy EBITDA margins and strongly negative operating working capital positions, indicating more cash generated per unit of revenue growth.

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AlexandreLega
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92 views4 pages

CashFlow Profile Formula

1) Charles Mulford developed the Cash Flow Growth Profile framework to systematically analyze corporate cash flows. It breaks down free cash flow into EBITDA margin, operating working capital, capex, and taxes as a percentage of revenue. 2) The author analyzed UK-listed shares using this framework and found that companies with stronger Cash Flow Growth Profiles outperformed those with weaker profiles over two years. 3) Many of the top 25 companies had healthy EBITDA margins and strongly negative operating working capital positions, indicating more cash generated per unit of revenue growth.

Uploaded by

AlexandreLega
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Charles Mulford’s “Cash Flow Growth Pro le.”

Charles Mulford is a professor at Georgia Tech who has done a lot of work on analysing corporate cash ows. He
developed the framework which he dubbed “Cash Flow Growth Pro le”. It is an excellent way to systematically
look at a lot of companies and get a feel for how much free cash should be generated per unit of revenue growth.

As with many of the best frameworks, it is simple and easy to implement. In short, it puts most of the key moving
parts in the cash ow statement in terms of a percentage of revenue and then builds them up to nish with a view
of free cash per unit of sales.

Cash Flow Growth Pro le = EBITDA margin - Operating Working Capital/Revenue - Capex/Revenue -
Tax/Revenue

In English, the above is effectively breaking up free cash ow into the gross cash generation, the working capital
burden, the capex and the tax, all as a percentage of revenues. This is a useful framework as it allows you to
quickly see how much of a company’s cash generation is down to margin, how much is generated or used by
operations via Working Capital, and how much is needed for capex and tax.

Operating working capital as a percentage of revenue shows how much funding is needed to support operations,
or critically, how much a business can organically fund growth. It is calculated as Accounts Receivable + Inventory
- Accounts Payable.

If the business receives cash upfront from customers but doesn’t pay suppliers for a couple of months, then the
cash cycle is highly bene cial in that receivables will be low versus payables and could yield a negative operating

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working capital position. Greater revenues then lead to higher levels of “ oat” as Warren Buffett calls it, the best
source of internal funding. 

How do UK-listed shares stack up?

I have examined the pro le of all the equities listed in the UK, both in 2015 and 2016 to see which companies
stand out as having a great Cash Flow Growth Pro le. As with any of these frameworks, they don’t work for all
businesses, so I’ve stripped out negative EBITDA margin companies and those with revenue growth less than 10%.
After all, if revenues are growing at a glacial rate or worse, then the bene ts of a healthy cash cycle are less
relevant to growth.

I also lter out some of the less relevant sectors such as:

Trusts & Funds,


Asset Management,
Biotech,
Oil & Gas,
Mining,
Real Estate,
Banks, and
Insurance.

The above lters cut the list of equities from c.1,500 down to c.370 shares of interest. I’ve ranked them from best
to worst for each of 2015 and 2016 and aggregated the scores into a combined rank.

Below are the full results plotted on a scatter graph, plotting the 2016 Cash Flow Growth Pro le:

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Interestingly if you look at how the top 20 companies (blue dots) in the rank fared over the last two years
compared to the bottom 20 companies (red dots), there is a clear outperformance.

The average total return across the top 20 was 26% per annum for the years April 2015-16 and April 2016-17.
However, the bottom 20 ranked companies had an average total return of 10% per annum. That’s a 16%
outperformance each year.

Furthermore, the clustering is far healthier for the top 20 companies compared to the bottom 20 (which you can
see above are all over the place).

Here are the top 25 companies in more detail:

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As you can see, many of these business models have healthy EBITDA margins (or Operating Cushions). What’s
more interesting is they all have strongly negative operating working capital positions.

The platform companies unsurprising look good on these metrics with Rightmove, Just Eat and ZPG. JE’s negative
operating working capital of -33% is a very healthy cash ow model. ZPG’s is still good, albeit lower at -16%.

On The Beach is another example of a high growth, capital light business whose cash cycle means that 70% of
revenues are converted into core cash for the rm, with little in the way of capex obligations to use up that cash.

Iomart is an exciting cloud services consultancy with decent EBITDA margins of 40+% and a negative working
capital model (although the numbers are slightly attered here by a high current borrowings gure).

UBM is a global event organiser. Its business model generates an ok EBITDA margin of 24%, but cash is received
more or less upfront from customers and not paid to suppliers til much later, driving a 44% of revenues converting
into core cash.

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To read a brief outline of how I think about stocks, and what I aim to achieve in this blog, please check out my rst
blog where I set out my stall.

Recent blogs:

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