Why Spartan Stores's Earnings May Not Be So Hot
Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Spartan Stores (NAS: SPTN) , whose recent revenue and earnings are plotted below.
Over the past 12 months, Spartan Stores generated $24.3 million cash while it booked net income of $31.8 million. That means it turned 0.9% of its revenue into FCF. That doesn't sound so great. FCF is less than net income. Ideally, we'd like to see the opposite.
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).
So how does the cash flow at Spartan Stores look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.
With 33.4% of operating cash flow coming from questionable sources, Spartan Stores investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 27.0% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 53.7% of cash from operations.
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.
- Add Spartan Stores to My Watchlist.
The article Why Spartan Stores's Earnings May Not Be So Hot originally appeared on Fool.com.Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.