In the quest to find great investments, most investors focus on earnings to gauge a company's financial strength. This is a good start, but earnings can be misleading and incomplete. To get a clearer understanding of a company's ability to earn money and reward you, the shareholder, it's often better to focus on cash flow. In this series, we tear apart a company's cash flow statement to see how much money is truly being earned and, more importantly, what management is doing with that cash.
Step on up, Suncor Energy
The first step in analyzing cash flow is to look at net income. Suncor Energy's net income over the last five years has been impressive:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Normalized Net Income | $4.5 billion | $2.8 billion | $0.7 billion | $1.9 billion | $2.2 billion |
Source: S&P Capital IQ. *12 months ended Sept. 30.
Next, we add back in a few non-cash expenses, like the depreciation of assets, and adjust net income for changes in inventory, accounts receivable, and accounts payable -- changes in cash levels that reflect a company either paying its bills or being paid by customers. This yields a figure called "cash from operating activities" -- the amount of cash a company generates from doing everyday business.
From there, we subtract capital expenditures, or the amount a company spends acquiring or fixing physical assets. This yields one version of a figure called free cash flow, or the true amount of cash a company has left over for its investors after doing business:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Free Cash Flow |
$2.2 billion |
($0.3 billion) |
($1.4 billion) |
($3.5 billion) |
($1.7 billion) |
Source: S&P Capital IQ. *12 months ended Sept. 30.
Now we know how much cash Suncor Energy is really pulling in each year. Next question: What is it doing with that cash?
There are two ways a company can use free cash flow to directly reward shareholders: dividends and share repurchases. Cash not returned to shareholders can be stashed in the bank, invested in other companies, or used to pay off debt.
Here's how much Suncor Energy has returned to shareholders in recent years:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Dividends | $0.6 billion | $0.6 billion | $0.4 billion | $0.2 billion | $0.2 billion |
| Share Repurchases | $0.1 billion |
-- |
-- |
-- |
-- |
| Total Returned to Shareholders | $0.7 billion | $0.6 billion | $0.4 billion | $0.2 billion | $0.2 billion |
Source: S&P Capital IQ. *12 months ended Sept. 30.
As you can see, the company has repurchased a decent amount of its own stock. But combined with other rounds of share issuance (mostly to finance acquisitions), shares outstanding have increased:
|
2011* |
2010 |
2009 |
2008 |
2007 |
|
|---|---|---|---|---|---|
| Shares Outstanding (millions) | 1,570 | 1,562 | 1,198 | 932 | 922 |
Source: S&P Capital IQ. *12 months ended Sept. 30.
Now, companies tend to be fairly poor at repurchasing their own shares, buying feverishly when shares are expensive and backing away when they're cheap. Does Suncor Energy fall into this trap? Let's take a look:
Source: S&P Capital IQ.
Suncor has only repurchased shares on two occasions in the last five years, but both rounds took place after shares dropped significantly. That's nice to see. There isn't enough information here to gauge whether management is astute in buying its shares, but what little information we have is moving in the right direction.
Finally, I like to look at how dividends have added to total shareholder returns:
Source: S&P Capital IQ.
Over the last five years, Suncor Energy shares returned -19%, which drops to -21% without dividends -- a small boost to top off otherwise poor returns.
To gauge how well a company is doing, keep an eye on the cash. How much a company earns is not as important as how much cash is actually coming in the door, and how much cash is coming in the door isn't as important as what management actually does with that cash. Remember, you, the shareholder, own the company. Are you happy with the way management has used Suncor Energy's cash? Sound off in the comment section below.
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