Jaguar, where'd that extra $1 billion come from amid big yearly losses?

With a jump in cash flow that big, it's worth asking how Jaguar pulled it off - particularly given its checkered performance in China.

Cash is fungible. So if a company suddenly has $1 billion more of it, does it matter where it comes from? For Jaguar Land Rover, it should.

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In its latest results, the iconic UK car company, owned by Tata Motors Ltd., posted around 1.4 billion pounds of free cash flow ($1.77 billion). That's a sharp turnaround from a running cash-burn rate of more than 500 million pounds per quarter over the last two years, and around negative 2.7 billion pounds over the last nine months alone. The company attributed the sharp rise to its efforts to manage working capital, including inventory reductions.

Meanwhile, Jaguar’s other numbers looked dismal – profits were down and debt was up from a year earlier. Free cash flow was “the only positive in these results,” Goldman Sachs Group Inc. analysts wrote in a note.

With a jump in cash flow that big, it’s worth asking how Jaguar pulled it off – particularly given its checkered performance in China.

Over the years, the company pushed a large volume of cars into the mainland market, offering some models at steep discounts. That ended up clogging inventory channels and burdening dealers. Around 70% of them lost money in the third quarter. Roughly 40% of the company’s dealers were based in tier 3 to tier 5 cities, and have been operating for less than three years: It takes a good deal more than an inexperienced staff to sell luxury cars in China’s poorest cities.

Jaguar has also spent aggressively on research and development and capital expenditure, with investment outlays comprising almost a fifth of total revenue. The company’s burden ticked up in tandem – to 4.5 billion pounds over the past year – and its leverage ratio rose to 2.3 times earnings before interest, tax, depreciation and amortization from 1.3 times at the end of last year.

To shore up the quarters of cash burn, Jaguar reduced spending and made around 100 million pounds in profit in the fourth quarter. Part of it was seasonal, too. But another maneuver also helped the company manage its working capital.

The company expanded a so-called factoring facility(3) – a working-capital loan – to $700 million from $295 million. For this to work, a company sells its receivables at a discount to raise money. When the dealer pays the company back, it can then repay its lenders. There’s a steep cost associated with this, of course.