Focused Compounding EP 277. Working Capital and the Cash Flow Statement: The Cash Conversion Cycle of a Business
Nov 5, 2020
Geoff Gannon, an investment analyst and writer known for his expertise in valuation and cash flow analysis, dives into the intricacies of working capital. He explains why cash flow is often a more reliable metric than earnings, discussing the implications of stock-based compensation and dilution. Listeners will learn about managing receivables during crises, the impact of inventory on cash flow, and signs of aggressive sales tactics. Gannon also shares insights on industry comparisons, using examples from Amazon and Micron to illustrate his points.
AI Snips
Chapters
Transcript
Episode notes
Use Working Capital To Gauge Pricing Power
- Use inventory levels, payment terms, and credit extensions as signals of supplier pricing power.
- Large inventories, generous credit, or broad selection often indicate weaker pricing power.
Float Fueled Carnival's Growth
- Cruise and entertainment firms often run negative working capital by collecting advanced payments and using that float to finance assets.
- Carnival famously grew by using customer prepayments to fund ship purchases.
Earnings Without Cash Is Dangerous
- Cash flow from operations materially below net income is a red flag; small businesses can report profits while lacking cash.
- Positive earnings without cash often precede liquidity crises and borrowing.