The Business of Value Investing.pdf

26 The Business of Value Investing

back over several years, I see that Mohawk has done excep t-

ionally well:

Year Sales ( $ billions) Net Profits ( $ millions)

2004 $ 5.8 $ 371

2005 $ 6.6 $ 387

2006 $ 7.9 $ 456

When looking at the cash fl ows, the picture looks even better:

Year Operating Cash Flow

2004 $ 242 million

2005 $ 561 million

2006 $ 782 million

2007 $ 875 million

In analyzing the strength of a business, you want to focus more

of your attention on cash fl ows, as they truly represent the cash

being generated by the business. A company can boost its sales, and

hence its profi ts, by extending a lot of credit to its customers. As

a result, the profi ts rise, but no cash has come in the door. Until

the customers pay off their credit bills, you don ’ t have the cash.

Operating cash fl ow, however, accounts for all these adjustments

and reveals just how much cash is coming into the door. As you can

see from Mohawk, the picture looks very good.

To take this one fi nal step further and see what cash is left

over for the investors, we examine free cash fl ow. Free cash fl ow

is simply the cash left over after the company pays its bills, or

expenditures. Mohawk ’ s expenditures for 2004, 2005, 2006, and

2007 were $ 106 million, $ 247 million, $ 166 million, and $ 163 mil-

lion respectively.

Mohawk ’ s free cash fl ow picture looks like this:

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