Cash Flow Analysis: Colgate-Palmolive Co (CL) – ProThinker

Name of Company	Country of Origin/ Exchange Traded	Sector	Stock Price
COLGATE-PALMOLIVE CO	US/ NYSE	Consumer Defensive – Consumer Packaged Goods – Household & Personal Products	USD64.81
			@ 01 Jul 2018
COMPANY PROFILE	Colgate-Palmolive Co is a consumer products company. It provides services such as oral care, personal care, home care and pet nutrition. Since its founding back in 1806, Colgate-Palmolive is now one of the world’s largest consumer product companies. In addition to its namesake oral care line, the firm manufactures shampoos, shower gels, deodorants, and home care products that are sold in over 200 countries around the world (international sales account for about 75% of its consolidated total, including approximately 50% from emerging regions). It also owns specialty pet food maker Hill’s, which sells its products through veterinarians and specialty pet retailers.
Stock Code	CL
Cash Flow Analysis Below

Cash is the lifeline of a business. The company needs cash, not profits to pay salaries, suppliers etc. Profits may not translate to cash if a company is not efficient in managing its Cash Conversion Cycle (more of that below). For example, when a company sells a product at a price higher than costs, it makes a profit. But until he collects payment from the customer, the profit does not translate into cash. Cash Flow Analysis is about analyzing whether a company is able to generate healthy cash flows, which are essential not only to grow the business but also to remain in business.
The chart belows looks at whether the company’s cash has increased or decreased through the years (the blue line indicates the change in cash). The colored boxes show what had caused the cash to increase or decrease. If the boxes are above/below the zero line, it had caused an increase/decrease in cash during that year. In a healthy situation, the company should be generating Cash from Operations (i.e. from its core business). If a company generates Cash from Financing, it means it is borrowing more, which may cause its financial condition to deteriorate. If it generates Cash from Investing, it means it is either issuing more shares, which may lead to earnings dilution or selling businesses/assets, which may lead to lower future earnings.

In the last 5 years, the company’s cash increased cash by USD971,000. Cash from Operations increased cash by USD15,646,000, Cash from Investing Activities decreased cash by USD3,404,000 while Cash from Financing Activities decreased cash by USD11,271,000. The most important contributor to cash is Cash from Operations, which is a heathy sign.

In a healthy situation, a company should get most of its Cash from Operations by increasing its Funds from Operations (i.e. Net Income plus Non-cash expenses). When a business grows, part of the profits may be tied up in working capital (as receivables and inventory increases) but this should not consume up the majority of the Cash from Operations.
In the last 5 years, the company’s Cash from Operations increased cash by USD15,646,000. The biggest item affecting Cash from Operations is Funds from Operations (i.e. Net Income plus Non-cash expenses), which increased cash by USD13,305,000. This is a healthy sign. This is followed by Cash Flow from Other Operating Activities, which increased cash by USD2,036,000.

A growing company may continuously need to raise funds via issuance of stock and debt. However, if this is done excessive, it will lead to an unhealthy situation. Too much new issue of stocks will dilute Earnings per Share and too much debt will cause the company’s financial condition to weaken. Payment of Dividends or share buybacks are good if the company is profitable and generating healthy Cash from Operations. However, a company should not be issuing new debt in order to do these.
In the last 5 years, the company’s Cash from Financing Activities decreased cash by USD11,271,000. The biggest item affecting Cash from Financing Activities is Payment of Dividends, which decreased cash by USD7,358,000. This is followed by Net Issuance/(Repurchase) of Stock, which decreased cash by USD7,336,000.

The company relied very little on borrowings to pay dividends and/or buy back shares, which is a healthy sign.

Cash Flow from Investing Activities refers to whether the company is spending money to purchase assets or businesses or raising cash by selling assets or businesses. This analysis goes hand-in-hand with the analysis of Free Cash Flows above. We want to ensure that a company is generating enough cash flow from its businesses even after making the necessary investments. Unless investment is a core component of a company’s business, it should not be spending a large amount of cash to make investments.
In the last 5 years, the company’s Cash from Investing Activities decreased cash by USD3,404,000. The biggest item affecting this is (Purchase)/Sale Of Property, Plant, Equipment, which decreased cash by USD655,000. This is followed by (Purchase)/Sale Of Investment, which decreased cash by USD238,000. 1.6% of total cash used on investing activities is accounted for by net purchase of investments.

Cash Conversion Cycle

A company that is in the business of producing and selling physical goods typically goes through this cycle: purchase inventory, work on the product, sell on credit and collect from customers. The period taken from the time it pays for the inventory in cash to the time it collects back cash from its customers is called the Cash Conversion Cycle.
The Cash Conversion Cycle comprises the time inventory remains in the factory (production and selling cycle) and the time it takes for your customers to pay you (customer credit period), less the time you take to pay your suppliers (supplier credit period). The company’s Cash Conversion Cycle is depicted graphically below. Generally, the shorter the cash conversion cycle the better.

Cash Conversion Cycle has been shorterning (improving) since 2007. The latest Cash Conversion Cycle of the company as at Dec 2017 was 35.5 days.
During this period… * Inventory Days contributed negatively to the Cash Conversion Cycle. * Receivables Days contributed positively to the Cash Conversion Cycle. * Payables Days contributed positively to the Cash Conversion Cycle.

Inventory Days refers to the average number of days inventory stays in the company before being sold. Lengthening Inventory Days could be due to prolonged production or sales cycle.
Inventory Days has been lengthening (deteriorating) since 2002. The latest Inventory Days as at Dec 2017 was 72.2 days.

Receivables Days reflect the average time it takes for the company to collect cash from its customers. If the company is increasingly collecting cash later than its credit terms, this may be an indication of potential bad debts.
Receivables Days has been shorterning (improving) since 2000. The latest Receivables Days as at Dec 2017 was 35.0 days.

This measures the average length of time company takes to pay supplers. A lengtheneing period could mean company is able to extend credit term from suppliers but may also be symptomatic of payment problems.
Payables Days has been lengthening since 2001. The latest Payables Days as at Dec 2017 was 71.7 days.

Cash Flow Analysis is a component of Financial Condition Analysis, which is an important part of stock analysis because an investor will make a loss on a stock if it goes bankrupt. The financial condition of a company is also important because investors will attribute a discount to the theoretical fair valuation of the company depending on how bad the financial condition is. ProThinker uses multiple valuation indicators to value a stock and then attribute a discount when necessary depending on the financial condition.
The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here.
Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
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