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Technology Stocks : Wind River going up, up, up!
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To: Jim Privat who wrote (990)4/25/1997 10:28:00 PM
From: Allen Benn   of 10309
 
>What constitutes cash that CAN be taken out of a company?

Warren Buffett finesses many subtle definitions about a company's future cash flow by simply saying "can". Cash that can be taken out of a company consists of dividends and retained earnings in excess of needed working capital and capital investments, plus non-cash expenses like depreciation added back in. This form of cash is commonly called Free Cash Flow.

You can obviously take dividends out of a company, since they are already. Free cash flow plus dividends represents the maximum cash that can be taken out without directly affecting operations. (However, there could be significant indirect effects, which can confuse things, particularly downstream.)

Since most high-tech companies abstain from issuing dividends, for these companies it usually boils down to just Free Cash Flow.

Even if Free Cash Flow remains in the company, rather than distributed ever as dividends, Buffett sees it as Owner's Cash, and considers a prorata share of it as his, as a stockholder.

Earnings is a poor-man's substitute for Free Cash Flow, and generally suffices where balance sheet has limited assets that depreciate or need to be amortized, like Good Will. Earnings is also a lot easier to deal with since it is a reportable item; albeit REITs all report Funds From Operations which is similar to Free Cash Flow in addition to earnings.

Allen
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