Corporate Profits vs. Cash Flow
I am not an accountant. That said, I believe I understand two basic concepts: 1) cash is the lifeblood of most businesses; 2) profits tend to be mean-reverting (i.e., they swing back from high and low extremes towards long-run averages) because of fluctuations in the level of competition, which rises and falls depending on current and hoped-for returns, and various other factors.
Under the circumstances, some might say the following graph does not paint an especially promising picture for share prices in the years ahead.







What about defense contracts? How are those awarded? The NewsVisual article today http://www.newsvisual.com/newsvisual/2007/12/experienced-boa.html#more reported that the company won a $91 million contract to continue work on fire control systems aboard U.S. and U.K. Guided Missile Submarines. The article suggests that because of the experience of the company’s Board of Directors, which it maps out to some extent, it’s likely to win future contracts as well.
Posted by: Fred | December 03, 2007 at 08:00 PM
Fascinating chart. Can you please explain where the cash flow data comes from and how it is calculated?
Posted by: cb | December 05, 2007 at 05:51 PM
The Cash Flow, Profits, and GDP Data come from the Bureau of Economic Analysis (by way of Bloomberg). Below are the descriptions and most recent quarterly data points:
U.S. Corporate Profits With Inventory Valuation Adjustments and Capital Consumption Adjustments - Total, Current Dollars, Seasonally Adjusted
(Q3 2007 = 1623.10 Billion)
U.S. Corporate Profits With Inventory Valuation Adjustments and Capital Consumption Adjustments - Net Cash Flow, Current Dollars, Seasonally Adjusted
(Q3 2007 = 1286.50 Billion)
U.S. Gross Domestic Product, Nominal Dollars, Seasonally Adjusted Annual Rate
(Q3 2007 = 13967.30 Billion)
Posted by: Michael Panzner | December 05, 2007 at 06:27 PM