Cash is a Vital Sign: Are You Breathing?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most investors make a deadly error: they overlook the statement of cash flows.  Taught after the income statement and balance sheet at most universities and placed at the very bottom of the link pile in Yahoo! Finance, the statement is easy to ignore.

However, cash flow is one of the most important parts of a company.  You could liken the income statement to observing a person to see how she looks – but then again that person can always hide her figure by wearing different types of clothes.  The balance sheet is akin to taking a man’s weight.  “How much do you weigh today?”  The number will likely change tomorrow.

But the cash flow statement is like taking a person’s vitals.  What’s your blood pressure?  Are you breathing?  Just like a person without a pulse won’t be a person for very long, a company that cannot generate cash will not stay a company for very long.

Key Metrics

I have chosen to explore a few key metrics that most will not find taught in many classrooms or websites – but they show the inner workings of a company.  They are as follows:

  • Cash Flow from Operations – Cash flow a company generates from its core businesses
  • Cash from Operations/Revenue – Tells investors what percent of total revenue comes in the form of cash
  • Cash Flow from Investing – Cash a company invests into core areas of its business like plant, property, and equipment or real estate
  • Cash from Investing/Total Cash – Tells investors how much cash the company invested relative to how much the company has – if too low, why is the firm stockpiling cash?  If too high, the company may be taking on excessive debt
  • Cash Flow from Financing Activities – Cash a company pays out (to repay debts) or receives (if it incurs debts)
  • Cash from Financing/Total Debt – Cash a company receives or pays relative to the firm’s total debt – if the number is disproportionately high, it could be buying back large amounts of debt or stock or paying out large dividends

As a reference point, the above numbers can be positive or negative.  Negative numbers for operating, investing, and financing indicate that the company lost money, made investments, and paid back debt, respectively.  On the contrary, positive numbers indicate that the firm made money, sold assets to generate cash, and incurred debt.

Below is a sampling of four oil and gas companies and how they fare using these metrics.  I will add some analysis, but the purpose of the chart below is for investors to think through the impact of each number on each company’s business.  Data is accurate as of June 30, 2012.


<table> <tbody> <tr> <td>(Numbers in Thousands)</td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td><strong>Company</strong></td> <td><strong>CF Operations</strong></td> <td><strong>Total Sales</strong></td> <td><strong>CF Ops/Total Sales</strong></td> <td><strong>CF Investing</strong></td> <td><strong>Total Cash</strong></td> <td><strong>CF Inv/Total Cash</strong></td> <td><strong>CF Financing</strong></td> <td><strong>Total Debt</strong></td> <td><strong>CF Fin/Total Debt</strong></td> </tr> <tr> <td><strong>ExxonMobil <span class="ticker" data-id="206209">(NYSE: <a href="">XOM</a>)</span></strong></td> <td> $     10,217,000</td> <td> $   127,363,000</td> <td>8.0%</td> <td> $   (3,756,000)</td> <td> $ 17,800,000</td> <td>21.1%</td> <td> $   (7,153,000)</td> <td> $ 15,580,000</td> <td>45.9%</td> </tr> <tr> <td><strong>ConocoPhillips <span class="ticker" data-id="203175">(NYSE: <a href="">COP</a>)</span></strong></td> <td> $       2,400,000</td> <td> $     13,400,000</td> <td>17.9%</td> <td> $   (2,900,000)</td> <td> $   1,040,000</td> <td>278.8%</td> <td> $   (2,100,000)</td> <td> $ 26,960,000</td> <td>7.8%</td> </tr> <tr> <td><strong>Chesapeake <span class="ticker" data-id="203108">(NYSE: <a href="">CHK</a>)</span></strong></td> <td> $          755,000</td> <td> $       3,388,000</td> <td>22.3%</td> <td> $   (1,271,000)</td> <td> $   1,020,000</td> <td>124.6%</td> <td> $     1,109,000</td> <td> $ 14,570,000</td> <td>-7.6%</td> </tr> <tr> <td><strong>Chevron <span class="ticker" data-id="203255">(NYSE: <a href="">CVX</a>)</span></strong></td> <td> $       9,915,000</td> <td> $     62,608,000</td> <td>15.8%</td> <td> $   (5,506,000)</td> <td> $ 21,460,000</td> <td>25.7%</td> <td> $   (1,965,000)</td> <td> $ 10,230,000</td> <td>19.2%</td> </tr> </tbody> </table>

Looking through the chart, a few items catch my eye and demonstrate the nature of the oil and gas business.


  • Exxon’s operating cash flow margin is far lower than competitors – are its sales going to receivables, or does it have higher costs than competitors?
  • The firm has an incredibly high cash flow from financing relative to debt.  Where is this cash going?  If it goes to dividends and stock buybacks (in Exxon’s case it does), does the company have enough money from operating cash flow and earnings to pay back the debt? 

If the money is in fact paying off debt, is that a good investment for the firm relative to the return on capital of other investments (read: can the company earn greater than the interest rate by investing the cash?)


  • The investments to total cash ratio is almost 3:1.  Is this money coming out of operations or out of debt? 

It looks like ConocoPhillips is taking out more debt to invest, adding to its debt stockpile – this could be dangerous, especially considering that ConocoPhillips owns 47% of the combined debt of these four companies.


  • Chesapeake’s operating cash flow margin is high because its sales are disproportionately low. 
  • Chesapeake is investing 1.25 the amount that it has in the bank – the company’s operating cash flow is very low, so likely the firm is looking to the debt markets to finance these investments.
  • The only company in the list to actually see a positive cash flow from financing is Chesapeake – it borrowed an additional $1.1 billion last quarter, meaning that its borrowing outpaced its dividends, stock buybacks, and debt repayment combined.  The price of oil is booming and its competitors are buying back stock or debt – but Chesapeake needs more debt.  The company is either in trouble or leveraging itself to the hilt (hint: the answer is both).


  • Chevron is most similar to Exxon, but why is its operating cash flow margin so much higher than Exxon’s?  Did cash collections pick-up last quarter, is the firm factoring receivables, or did expenses shrink?

Industry Overall

  • The firm’s huge amounts of cash on hand and total debt confirm that the industry is very capital-intensive.
  • The companies have large ratios of investing to cash-on-hand, demonstrating that this in an investment-rich time for oil companies.  This fact is confirmed by the announcement that the companies are leaving natural gas drilling for the time being to invest in oil drilling.


Doctors take the vital signs of their patients to understand how the patients’ bodies are performing.  Just like doctors, I recommend that investors comb through the cash flow statement to understand the vital signs of their investments. 

The analysis above gets the job done – but it was taken from Yahoo! Finance, and hence is a little rough.  For a very detailed analysis, I suggest pulling a company’s 10-k filing, its Annual Report, from the firm’s website.  Outlining your key metrics and analyzing them periodically will give you more insight than simply understanding “what just happened” with your investment.  It will give you insight into where the company is headed in the future.

ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, short JAN 2014 $17.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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