Cash Flows Don’t Lie (Or Do They?)


Fundamentalists believe that the cash flows in a company’s book never fail to provide a realistic picture of the business’ current state. However, sometimes sale of receivables can help keep the debt off-balance sheet and result in much better reported cash flow performance.

Early this year, a renowned chemical giant’s planned merger with a massive conglomerate created a buzz in the news and that is when we decided to deep dive into the prior’s cash flows. Our analysis has found that the working capital improvement since 2010 is mainly due to sale of receivables to conduit on a non-recourse basis.

As can be seen in the table below, the Operating cash flow to sales margin improved since 2012. This is even after considering $2.16 billion one-off arbitration award to the Company. The same was not real operational improvement but rather receivable sales which helped improve operating cash flows while also keeping debt off balance sheet. The company rightly used the same improvement for share repurchases and higher dividend payout.

A rational investor will spot the twist in the plot with careful scrutiny. A close look at the operating cash flows to sales ratio exhibits that it has improved post 2012. Moreover, the net receivable sale to operating cash flow has also turned positive starting 2012. The aforementioned analysis makes it clear that post 2012 the company has been adding the proceeds from sale of receivables to the operating cash flow.

Source Company 10Ks, numbers are in USD millions


The cash flow figure in a company’s books is considered to be a measure of its real value. But in this instance, the improvement in operating cash flows through working capital is not a core business improvement. In fact it is just a case of financial engineering.

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