Cash Flow Analysis Blog #4 – net income & trend analysis
“My problem lies in reconciling my gross habits with my net income.”
We continue the analysis by comparing operating cash flow with net income. Except for 2012, operating cash flow is higher than net income. This is good, because for a mature company, net income includes non-cash expenses such as depreciation and amortization.
However, trending analysis on these two metrics revealed a troublesome pattern - both have declined in the last three years, suggesting a decline in financial performance:
In fact, when we dug deeper to see if operating cash flow is sufficient to cover investing and financing needs, the trend is a fluctuation over the past five years, with a general downward trend:
It seems that the cause of this downward trend in our example company Caterpillar (CAT) is its tendency to reward its investors with frequent dividends and stock buybacks:
