Cash Flow Trends and Their Fundamental Drivers: A Study of Technology Firms

In this report, we focus on the financial performance of the average technology firm. The average technology firm is defined using the relative market capitalization of each firm in five general technology groups: Computer hardware & peripherals, telecommunications equipment, computer software, information technology services, and semiconductors and related capital equipment. We focus on cash flow, presenting certain cash flow measures that are analyzed using selected fundamental drivers. For the average technology firm, core operating cashflow, operating cash flow, and free cash flow declined over six percent in the four quarters ending March 2006 from the four-quarter period ending December 2005. Contributing to the decline in cash flow were a decrease in revenue and an increase in the cash cycle, caused by an increase in inventory days and a decline in payables days. Operating cushion trended higher in the March 2006 annual period, partially offsetting the effects on cash flow of the revenue decline and the cash cycle increase. As such, each of the cash flow measures can move significantly higher if a future increase in revenue were accompanied by a return to earlier levels of inventory and/or payables days. Data for this research was provided by Cash Flow Analytics, LLC. Charles Mulford is a principal in Cash Flow Analytics, LLC