Cash Flow Trends and Their Fundamental Drivers: A Value-Weighted Index of the S&P 500 Non-Financials

With this report, we introduce a series of cash flow indices for the non-financials of the S&P 500. Each index, consisting of cash flow measures and their fundamental drivers, are calculated as a value-weighted average. The objective is to permit us to look closely at the cash flow performance of the S&P and to better isolate the factors underlying that performance. Future reports will look at industry subsets of all public companies, such as technology, biotechnology, and other groups that are of particular interest. Our analysis of the S&P 500 indicates that counter to recent trends, various cash flow measures were down in the four-quarter period ending December 31, 2005. The decline was driven by decreases in revenue and operating cushion, and by an increase in the cash cycle. Also of note, our earnings quality indicator, EQI, continued a declining trend begun in 2003