My professor Michael Granof at UT-Austin says “Banks don’t take profits – they take cash.” First thing I do when I read an annual report: compare net income to net cash flows from operations (CFFO). CFFO should be higher than net income.
Consider GM’s new quarterly report. Revenue up from 31.5 bill to 36.2 bill. EBIT up from 1.8 bill to 3.5 bill. Net income up from $0.9 bill to $3.2 bill this quarter. So far, it looks good.
Notice that operating cash flow from automobiles dropped from positive $1.9 billion to negative $ 0.6 billion. This suggests either that the earnings are of low quality, or that the cost of GM’s prolific growth is hurting its cash flows.