Re: Compaq's FCF & Market Guide.
Never having received a response from Market Guide to my e-mail query (reproduced in post #114), I finally called them, and got a reply from a pleasant gentleman by name of Dominic.
According to Dominic, the reason that the listed price/free cash flow ratio is lower for some of the companies Market Guide covers (e.g., Compaq) than the price/cash flow ratio is that MG calculates cash flow and free cash flow differently. That is, free cash flow is determined, as you would expect, by subtracting capital expenditures and dividends from operating cash flow, as listed on the consolidated cash flow statement. But the cash flow number, and the cash flow ratio, in turn, are derived not from the cash flow statement, but from the income statement. Like our friend Andrew, MG shuns the operating cash flow number, and instead takes the net income figure as its starting point, and adds in whatever its analysts think proper to reach a cash flow number.
Hence, in some cases, according to Dominic, it is indeed possible to come up with a price/free cash flow ratio that is lower than the price/cash flow ratio. However, he agrees with me that using two different standards for the cash flow ratios is very confusing for the end user of MG's materials. Apparently, I'm not the only person who has raised this issue.
Another point: the ratios in the Ratio Comparisons I have been citing are calculated on a 12-month trailing basis, so obviously they won't completely correspond to the most recent 10-K.
Dominic also sent me MG's complete financials for Compaq, so that I could see for myself how its cash flow calculation works out. I am not sure I can, but I will say that MG produces the completest set of financials I have ever seen, including all the data on the 10-K's balance sheet, income statement, and cash flow statement, for every year from 1986 through 1996. MG does the same for the most recent quarters, from the 9 months ending 9/30/97 (in Compaq's case) back to the 9 months ending 9/30/95.
In any event,after looking at MG's numbers (which do not in any respect diverge from the 10K and 10Q numbers), and fiddling with my trusty calculator, I conclude that the price/free cash flow ratio it gives for Compaq -- 12+ -- is about right.
I can't say the same for the price/cash flow number, because I don't know exactly what MG included and what it excluded when calculating cash flow from net income. But I repeat that the price/free cash flow data MG provides look fully trustworthy to me.
So, once again: go, Compaq! |
