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Strategies & Market Trends : Free Cash Flow as Value Criterion
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From: Harshu Vyas3/6/2024 11:12:38 AM
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I've been thinking about free cash flow for a while now. My thoughts are that the definition needs changing.

When I work out free cash flow I subtract amortisation charges from cash flow from operations. They're just a non-cash expense and unlike depreciation, it doesn't matter if the company doesn't "acquire" (for lack of a better word) new intangible assets. Of course, this isn't the same in every industry and each situation is different.

I like the idea of "EBDIaT less capex" as a measure but I don't know what it'd be called.
EBDIaT would be earnings before depreciation (and) interest after taxes. Similar to NOPAT but a subtle difference.

What about changes in working capital? Well, some analysts don't bother with it. I do. I look at the long-term history and work out where the business is in the business cycle. Growing businesses will have growing receivables and inventory etc. meaning that their cash flows will be weaker than a declining business.

That's another problem. Free cash flow doesn't factor in whether a company's growing/slowing. Slowing companies actually look better to investors!

And then there's the idea of subtracting only maintenance capex. That's also foolish. The cash has been invested. You must subtract full capex. If the business is investing for growth (and in most cases, the growth is necessary for business survival), you have to subtract full capex. Yes, it makes the free cash flow numbers look "worse" but that's the true figure.

This is just a rant about what I'm seeing from analysts. Hopefully, we can have more of a debate about free cash flow.
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