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Lennar Enjoys Adequate Cash Position

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Apr. 6 2015, Updated 7:06 p.m. ET

Cash is king

Positive cash flow means cash inflows are higher than cash outflows during a particular period. Positive cash flow doesn’t necessarily means profit. It can merely mean careful management of cash inflows and expenditures. However, no business can survive long without enough cash to meet its immediate needs.

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Lennar had adequate cash position in 2014

Lennar (LEN) had consolidated cash and cash equivalents of $1.3 billion in 2014 compared to $970.5 million the previous year. Lennar’s cash position is about 10% of its asset base. This is enough to finance part of its activities, including homebuilding, Lennar Financial Services, Rialto, Lennar Multifamily, and general operating needs. In addition to cash, the company has to rely on debt to fund its other activities.

Persistent and large positive cash flows from 2008 and 2009 may indicate that the company was finding less attractive investment opportunities in the market. It was also a natural reaction after the industry overbuilt during the bubble years. Since then, the industry has corrected for overbuilding and currently has the opposite problem of not having enough inventory.

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Operating cash position is impacted by inventories

Lennar (LEN) had operating cash flow of -$788.5 billion in fiscal year 2014. This compared to -$424.6 billion in 2012. In fiscal year 2014, cash used in operating activities was impacted mainly by an increase in inventories due to strategic land purchases and land development costs and an increase in financial services loans.

Lennar reported positive free cash flow

Free cash flow (or FCF) is a measure of how much cash a company generates after accounting for capital expenditures. This cash can be used for expansion, dividends, debt reduction, or other purposes. Lennar had FCF of $108 million as of November 2014.

Except for PulteGroup (PHM), most of the homebuilders such as D.R. Horton (DHI) and Toll Brothers (TOL) had negative free cash flow in 2014. D.R. Horton (DHI) had a free cash flow of -$140 million, while Toll Brothers (TOL) had -$36 million.

The operating model of homebuilders is extremely important for investment strategies of homebuilder ETFs such as the iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the SPDR S&P Homebuilders ETF (XHB).

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