Risk & Compliance

Flat Capex Weakens Economic Recovery

Although revenues are finally rising, companies haven’t increased capex in a year, a cash-flow review finds.
David KatzApril 23, 2014
Flat Capex Weakens Economic Recovery

Buttressed by increased corporate revenues and profits, the economy has begun taking a forward step, a cash-flow expert says. But it’s also been taking a backward stride: Corporate managers have been decreasing the capital expenditures (capex) and inventory spending that could sustain that sales growth.

To be sure, the data unearthed in a recently released quarterly review of cash-flow trends of nearly 3,000 U.S. publicly traded non-financial companies “offer us the first truly positive sign on the U.S. economy in three quarters – an uptick in median revenues,” says Charles Mulford, a Georgia Tech accounting professor who heads that university’s Financial Analysis lab.

For the reporting period ended December 2013, median revenues rose 2.95 percent, to $726.07 million, according to the lab’s quarterly study of corporate cash-flow performance. The study encompasses a series of rolling twelve-month periods from the first quarter of 2000 through the fourth quarter of 2013. (All of the companies have market caps of more than $50 million.)

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The late 2013 rise in median revenues followed a drop in sales that lasted for three straight quarters, ending at $705.3 million in September 2013. The drop occurred after median revenue grew for seven quarters in a row, to an all-time high of $788.5 million in the reporting period ended December 2012.

Flat Capex, Puny Inventories

And yet the results of the study “are mixed to positive — reflecting rather well the on-again, off-again performance of the overall economy,” according to the report accompanying the Financial Analysis Lab study.

While the revenue growth plus a small upturn in operating profitability “give reason for optimism, managers who were truly confident in the recovery would not be so tentative in their capital spending and would be growing their inventories, not shrinking them,” they write.

Indeed, capex fell again slightly, to 3.49 percent of revenue, during the twelve months ended December 2013, from 3.50 percent in September 2013. That was the fourth straight quarter of decreases, after a steep rise following the recession.

The flat-to-decreasing capex figures mean that corporate managers still aren’t convinced that the sales rise can be sustained beyond a quarter or two, according to Mulford, who noted that the lack of conviction has lasted long after the recession.

Even the post-recession capex rise “bounced off a ridiculously low number [recorded during] the recession,” he explains.

During the downturn, corporations took “tremendous amounts” of money out of capex to build up cash balances, he recalls. Currently, although companies have returned to relatively normal levels of capital spending, they haven’t replaced the investments they drained from their cash balances. “What about some catch-up spending?” asks Mulford. “We’re not seeing that.”

Another hangover from the downturn might be senior management’s tightfisted handling of working capital. “Managers were very careful in their management of working capital during the [fourth] quarter as receivables days and inventory days declined and payables days increased,” according to the report.

Managers continue to regard inventory spending warily because “they’re not yet convinced” that sales will continue on an upward path, says Mulford.