Free Cash Flow as Value Criterion Message Board

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Strategies & Market Trends : Free Cash Flow as Value Criterion

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To: jbe who wrote (207)	11/14/1997 10:41:00 PM
From: Andrew	Read Replies (1) of 253

Joan, you said: "And they don't seem to have a problem with the FSAB rules under which working capital is included in the calculation of operating cash flow." I just want to clarify my position here. I'm certainly not questioning the FSAB's rules. The purpose of the cash flow statement is to provide the missing link between the income statement and the balance sheet. Every fiscal year, there are substantial changes to the balance sheet that are not nearly fully explained by the income statement. The cash flow statement provides very useful information which fills in this gap. It's format is laid out to make it easy to total up all cash coming in, and where it went, as well as all cash going out, and where it came from. Changes in working capital are an excellent example of important information that is included here. What I'm suggesting is that the totals provided by this format aren't necessarily the same ones you would want to use in a meaningful FCF analysis. It's all a matter of what your goal is. The FASB's goal was to account for cash movements. My goal is to choose the items that to my understanding best reflect the cash-generating power of the company in the long term. Cash flows from sudden one-time inventory drops certainly belong on the statement; I just don't think they belong in my FCF valuation. They mask the general trend of the company's performance. Items such as this certainly may reflect important changes in a company's fundamentals (i.e. Compaq), but just adding them in may be an incorrect usage of the information - FOR VALUATION PURPOSES! I still have a lot of work to do to understand better the implications of a lot of these accounting items, so this is admittedly an amateur opinion. As for the book, it's definately on my list, but things are so crazy right now that it could be awhile. My "to read" pile is growing at a disconcerting pace! Andrew

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