Fears of Double-Dip Recession May Be “Overblown”: Report

With revenues surging, companies are investing in capex and revenue.
David KatzOctober 10, 2011

Rather than reflecting concerns about a return to an economic recession, corporations sported a sales surge of 15% and a rise in median cash flow of 4% between the first and second quarters of this year, according to a new quarterly report on cash-flow trends issued by the Georgia Tech Financial Analysis Lab.

“We’re seeing a continuation of investments in inventory and capital assets, an improvement in operating cushion, and generally the first signs of robust revenue growth that we’ve seen in many quarters,” says Charles Mulford, a Georgia Tech accounting professor who directs the lab. (Operating cushion is operating profit exclusive of noncash expenses, depreciation, and amortization.)

During the 2008–2009 recession, corporations slashed their investments in capital expenditures in order to boost their liquidity. That trend was reflected in a sharp rise in “free cash margin” (free cash flow divided by revenue), a metric employed by Mulford.

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But free cash margins have been turning around of late – a healthy sign according to the report, which is based on the financial reports of a sample of 3,000 nonfinancial publicly traded companies in 44 industries over the trailing 12-month period.

For the year ending in June, median free cash margin for the sample decreased to 4.63% from the 5.20% reported for the March 2011 period, continuing a trend that started with the end of the last recession in late 2009. The metric decreased for the fifth straight 12-month reporting period off of its March 2010 high of 7.18%.

Despite an uptick in operating cushion, investments in working capital, especially inventory, and rising capex drove free cash margin lower, according to the report. In particular, inventory days rose by 0.86 days, from 23.14 days in March 2011 to 24.00 days in June 2011. Capital expenditures increased to 3.16% of revenue in June from 3.01% in March.

While there’s “much concern today about the risk of a double-dip recession,” the secondquarter results “suggest that such concerns may be overblown,” according to the lab’s report.

“If companies were overly concerned about a decline in GDP, we would likely see declines in inventory levels and capital expenditures, instead of the increasing levels observed in the data. Moreover, the spurt in median revenues observed during the second quarter suggests that companies are growing and not declining,” the authors say.