(News Bulletin 247) – Most of the results season has now passed and many groups have seen their prices react to cash generation. This indicator has probably become the most relevant to look at, even if it will depend on the sectors.

The results season is now coming to an end, even if a few CAC 40 companies (Vivendi, Thales for example) still have to deliver their annual accounts over the coming week.

During the peak of this wave of publications, we asked our readers and listeners on social media what, in their opinion, was the “real” indicator to look at when a company publishes its results. Growth came out on top in this questionnaire, slightly ahead of free cash flow (or “free cash flow” in plain French).

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In reality, it depends on the sectors. In luxury or tech, the market tends to focus on like-for-like revenue growth. But for many other groups, investors are looking closely at cash generation. This is what emerged from this earnings season, during which many companies were driven by their cash generation.

Even before the wave of publications kicked off, the construction and concessions group Vinci had surprised investors, by warning in mid-January that its free cash flow would reach a new record in 2023. The stock then took 2 %.

Another example: the tire manufacturer Michelin was weighed down by its cash flow in 2022. During this season, the bibendum group on the contrary defied predictions with a free cash flow before acquisitions of 3 billion euros, compared to 2. 6 billion euros expected by analysts. Michelin jumped nearly 7% following its publication.

The “most relevant” indicator

Again this week, the pharmaceutical and food analysis laboratory Eurofins fell on the stock market (-6.7%) following the publication of its annual results. The income statement did not hold any unpleasant surprises, but cash generation came in far from analysts’ expectations and the company’s own forecasts.

Conversely, the conglomerate Bouygues stole the market (+8%) because its robust cash flow allowed it to significantly reduce its net debt, thus surprising the research offices.

Remember that free cash flow is not part of the income statement but is included in a separate table. This indicator ultimately allows us to know whether a group has burned or stored cash over a given financial year.

“To calculate the free cash flow we start from the gross operating surplus (Ebitda) from which we will subtract the variation in working capital requirements (customer receivables and inventories reduced by supplier debts), you thus pass from “a wealth indicator with its cash counterpart. Then you remove the obligatory disbursements: taxes and investments”, explains Pascal Quiry, professor of Finance at HEC and co-author of Vernimmen.

It is therefore a fairly “pure” performance measure. “Free cash flow is the most relevant indicator because at the end of the day this indicator shows the money we have to invest even more, to get out of debt, or to pay dividends or finance share buybacks. actions,” adds the academic.

Stronger cash therefore makes it possible to remunerate shareholders more. This is the common point between two companies which have absolutely nothing to do in terms of activity: Renault and Carrefour. Both reported significantly better-than-expected free cash flow this earnings season.

This allowed them to propose a much stronger dividend than anticipated by analysts: Renault is offering 1.85 euros per share for 2023, Carrefour 87 cents. These coupons exceeded analysts’ expectations by 33% and 55% respectively. Their shares have therefore increased significantly: Renault gained 6.5% following its results, Carrefour 5%. In the case of the distributor, the announcement was all the more appreciated by investors as the company maintained its commitment to increase its dividend by an average of 5% per year over the coming years.

We can also cite Stellantis. With an industrial free cash flow of nearly 13 billion euros in 2023, the Franco-Italian-American manufacturer will return more than 7.7 billion euros of cash to its shareholders this year in the form of dividends and buybacks. of actions.

Not a panacea though

“The other important point is that for companies that are difficult to analyze – we can think of Bouygues which is a conglomerate with numerous activities – this indicator has the merit of maintaining its relevance. Because cash does not lie and we cannot manipulate it except for scams like Wirecard (a German payment group which disappeared following accounting irregularities, Editor’s note) which are very rare”, continues Pascal Quiry. “In short, for the market to focus on free cash flow is both logical and healthy,” concludes the academic.

However, delivering free cash flow above expectations is not a panacea. The automotive supplier Forvia (formerly Faurecia) may have largely exceeded the consensus on free cash flow, but its shares fell by more than 20% in two sessions.

As Deutsche Bank noted, the market questioned the quality of the improvement in working capital requirements, fearing that this variation hides a wolf. Even though nothing indicated this as it was. Management had to hold a conference with analysts two days later to clarify several points. In particular the fact that reverse factoring, a mechanism allowing its suppliers to immediately receive payment of an invoice via a third party (the “factor” who later collects the money), was well recorded in its balance sheet and did not constituted only 10% of its supplier debt. The action regained ground and Stifel praised a “welcome” intervention. “The management of Forvia corrected all the erroneous interpretations and inaccuracies that circulated” two days earlier, appreciated the design office.

One of the large CAC 40 groups whose cash is in the market’s sights remains Alstom. Its shares plunged nearly 38% in the fall after the group announced that it had burned more than a billion euros in cash over the first six months of its staggered financial year. A solid cash flow when its annual results are published on May 8 is essential to begin its stock market redemption…