Can Cash Flow Lie?

For decades, investors have leaned on a simple belief. Cash flow tells the truth. Accounting can bend, earnings can wobble, but cash feels real.

A recent collapse is challenging that idea. The downfall of auto parts supplier First Brands has drawn attention to how some companies boost cash flow by delaying payments, often through supply chain finance programs. The result can look like strength on paper, even when underlying liquidity grows fragile.

The lesson applies far beyond auto parts. Cash flow can flatter companies that push payment obligations far into the future, especially when economic conditions stay calm.

Supply chain finance lets large buyers hold onto cash while suppliers get paid early by banks. The banks price those payments using the buyer’s credit rating, not the supplier’s. That lowers costs for suppliers and keeps buyers liquid.

The accounting treatment matters. These obligations usually sit in accounts payable, not debt. Leverage appears lower. Free cash flow looks stronger.

Accounting analyst David Zion likens the effect to financial steroids. The cash boost is real, but the strength can vanish quickly if conditions change.

Auto parts retailers offer extreme examples. Genuine Parts $GPC ( ▲ 1.76% ), O’Reilly Automotive $ORLY ( ▼ 1.45% ), and AutoZone $AZO ( ▼ 0.21% ) topped Zion’s analysis of supply chain finance impact across the S&P 500.

At Genuine Parts, these obligations equaled 51% of accounts payable and dwarfed recent free cash flow. O’Reilly and AutoZone stretched payments close to ten months. That works until it doesn’t.

When credit weakens, lenders pull back. Advance Auto Parts learned that lesson after falling into junk status. Genuine Parts now sits at the lowest rung of investment grade.

Cash flow may not have lied. But it did tell a story with an expiration date.