business
CHAPTER
2
Financial Statements, Cash
Flow, and Taxes
E
ven in today’s era of financial crises, $14.6 billion is a lot of money. This is the amount of cash flow that Hewlett-Packard’s (HP) operations generated in 2008, up from $9.6 billion in 2007, despite the recession.
The ability to generate cash flow is the lifeblood of a company and the basis for its fundamental value. How did HP use this cash flow? HP invested for the future by making over $11 billion in acquisitions.
Other companies also generated large cash flows from operations in
2008, but they used the money differently. For example, Walgreens generated over $3 billion from its operations and used over $2 billion for capital expenditures, much of it on new stores and the purchase of worksite health centers.
Procter & Gamble generated $15.8 billion. P&G made relatively small capital expenditures (abut $3 billion) and returned the lion’s share (over
$12 billion) to shareholders as dividends or through stock repurchases.
Apple generated about $9.6 billion (up from $5.5 billion the previous year) but made relatively small capital expenditures, acquisitions, or distributions to shareholders. Instead, it put about $9.1 billion into shortterm financial securities like T-bills.
These four well-managed companies used their operating cash flows in four different ways: HP made acquisitions, Walgreens spent on a mix of internal and external growth, P&G returned cash to shareholders, and
Apple saved for a rainy day. Which company made the right choice? Only time will tell, but keep these companies and their different cash flow strategies in mind as you read this chapter.
47
48
Part 1: Fundamental Concepts of Corporate Finance
Intrinsic Value, Free Cash Flow, and Financial Statements erage cost of capital (WACC). This chapter focuses on
FCF, including its calculation from financial statements and its interpretation when evaluating a company and manager. In Chapter
2
Financial Statements, Cash
Flow, and Taxes
E
ven in today’s era of financial crises, $14.6 billion is a lot of money. This is the amount of cash flow that Hewlett-Packard’s (HP) operations generated in 2008, up from $9.6 billion in 2007, despite the recession.
The ability to generate cash flow is the lifeblood of a company and the basis for its fundamental value. How did HP use this cash flow? HP invested for the future by making over $11 billion in acquisitions.
Other companies also generated large cash flows from operations in
2008, but they used the money differently. For example, Walgreens generated over $3 billion from its operations and used over $2 billion for capital expenditures, much of it on new stores and the purchase of worksite health centers.
Procter & Gamble generated $15.8 billion. P&G made relatively small capital expenditures (abut $3 billion) and returned the lion’s share (over
$12 billion) to shareholders as dividends or through stock repurchases.
Apple generated about $9.6 billion (up from $5.5 billion the previous year) but made relatively small capital expenditures, acquisitions, or distributions to shareholders. Instead, it put about $9.1 billion into shortterm financial securities like T-bills.
These four well-managed companies used their operating cash flows in four different ways: HP made acquisitions, Walgreens spent on a mix of internal and external growth, P&G returned cash to shareholders, and
Apple saved for a rainy day. Which company made the right choice? Only time will tell, but keep these companies and their different cash flow strategies in mind as you read this chapter.
47
48
Part 1: Fundamental Concepts of Corporate Finance
Intrinsic Value, Free Cash Flow, and Financial Statements erage cost of capital (WACC). This chapter focuses on
FCF, including its calculation from financial statements and its interpretation when evaluating a company and manager. In Chapter