Is cash flow a problem for Walgreens Boots Alliance?

Walgreens Boots Alliance (WBA 0.92%) it cut its dividend earlier this year. The company’s earnings haven’t been great, and it’s in the midst of rolling out health care clinics in its stores as part of an expensive move into health care. It’s been a tumultuous time for the drugstore retailer, and investors can tell that just from its share price: The last time Walgreens stock traded at these levels was in the previous millennium.

There are signs of trouble for the business, and one of the biggest problems a company can face is cash flow. Walgreens still pays a dividend, but the clock may be ticking. The company recently made a move to sell its last investment in the drug wholesaler Cencora (formerly AmerisourceBergen). Is this just the latest sign that Walgreens has a big cash flow problem?

Cash flow went in the wrong direction for Walgreens

Operating cash flow is one of the most important metrics investors can rely on when assessing the health of a business. If a company is struggling to generate positive cash flow from its day-to-day operations, this is potentially a big cause for concern as it suggests that the operations are not sustainable.

There have been several periods over the past year where Walgreens has consumed cash from its regular operating activities. And over the past five years, its cash flow has been going in the wrong direction.

WBA cash from operations (quarterly) data by YCharts

Cash flow can and does fluctuate, as seen in last quarter’s sudden shift from negative to positive. This is just the nature of business, as a large cash collection of receivables can suddenly increase cash flow. This is why the trend is arguably more important than an individual period. And the trend for Walgreens has not been good.

Compounding this problem is that the company still pays a dividend. And while Walgreens took a significant dividend cut earlier this year, even the reduced amount still costs the company about $216 million per quarter. This is cash that can be put to better use elsewhere.

The sale of Cencora stock will bring in about $1.1 billion for Walgreens, but it doesn’t solve the problems the company is currently facing.

Walgreens’ cash balance looks worrisome

Another problem is that compared to its $25 billion in current liabilities, the company doesn’t have much cash and cash equivalents on hand. And while its current assets total more than $16 billion, that’s also far less than its current liabilities.

WBA Cash and Equivalents Data (Quarterly) by YCharts

You can look at the chart and say that technically Walgreens has been in this situation for the past few years and has kept its head above water. But when you combine this visual with the previous one, it reveals a potentially dangerous situation. Not only is its debt high, but cash flow has been insufficient to cover day-to-day expenses in recent quarters.

Is Walgreens Stock Too Risky To Own?

This is not the first time that Walgreens has sold some of its shares in Cencora. But given its troubling cash position, it’s not a development you should ignore. And more asset sales could come if Walgreens’ financials don’t improve. Even if you’re a contrarian investor, you’ll want to think twice about owning Walgreens stock.

If new chief executive Tim Wentworth can turn the business around, it will be an epic achievement. He has been in business for less than a year and has already made moves to cut costs and cut the dividend to help give the business some freedom. But there is still more to do before investors feel comfortable owning the stock. There’s no shortage of challenges with Walgreens right now, but cash may be the biggest concern for investors.

Without some significant turnaround and some improved earnings and cash flow numbers, investors would simply be better off steering clear of this healthcare stock.