Excess Cash Margin and the S&P 100

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Mulford, Charles W.
Ely, Michael L.
Maloney, Kerianne
Martins, Mario
Quiroz, Raul
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Excess Cash Margin, ECM, calculated by dividing by revenue the difference between adjusted operating cash flow and adjusted operating earnings, provides useful insight into the relationship between cash flow and earnings. When ECM declines in a consistent manner it indicates that earnings are growing faster or declining more slowly than cash flow. As a result, relative to the scale of operations, increasing levels of non-cash accounts are accumulating on the balance sheet. Earnings generated in this manner, that is, with declining cash flow confirmation, are not sustainable and are at risk for decline. When ECM increases consistently it indicates that operating cash flow is either growing faster or falling more slowly than earnings. As a result, relative to the scale of operations, the balance sheet is being liquidated. Operating cash flow generated in this manner, that is, without consistent earnings support, is not sustainable and is at risk for decline. The better, more sustainable relationship between operating cash flow and earnings is when the two measures grow at consistent rates, resulting in a constant ECM through time. This study calculates ECM for the non-financial firms of the S&P 100 for the years 2000, 2001, and 2002 and provides commentary on the results. Insights are provided into firms with a declining ECM, an increasing ECM, and a stable ECM.
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