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Why Six Flags’ operating cash flows are prone to fluctuation

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Nov. 20 2019, Updated 1:07 p.m. ET

Cash operating costs

The theme park business involves significant levels of cash transactions. As a result, Six Flags Entertainment Corp.’s (SIX) operating cash flows are largely driven by attendance and per capita spending levels. This is because most of its cash-based expenses are relatively fixed and do not vary significantly with either attendance or per capita spending.

Theme park operators such as Cedar Fair (FUN) and SeaWorld Entertainment (SEAS) are also affected by this fixed-cost business model.

The above chart shows that Six Flags’ cash operating costs as a percentage of revenue have been declining since 2009. These cash-based operating expenses include salaries and wages, employee benefits, advertising, third-party services, repairs and maintenance, utilities, and insurance.

The advantage of a fixed-cost business model is that as revenue increases, profits significantly increase after meeting the break-even point. However, the high fixed-cost structure of theme park operations can result in significantly lower margins if revenues decline. 

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Cash earnings per share

Cash earnings per share (or EPS) is an operating cash flow. It’s a better measure than other EPS numbers because cash flow cannot be manipulated as easily as net income.

Six Flags’ cash EPS for the 12-month period ending September 30, 2014, was $2.51. That’s an increase of $0.30 per share or 14% compared to the prior 12-month period ending September 30, 2013.

Investors willing to hold a diversified portfolio in the leisure industry may invest in ETFs such as the iShares U.S. Consumer Services ETF (IYC), the Vanguard Consumer Discretionary Index Fund (VCR), and the Consumer Discretionary Select Sector SPDR Fund (XLY).

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