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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (11773)	1/10/2001 3:02:05 PM
From: Freedom Fighter	Read Replies (1) of 78476

Paul, I go back and forth on the issue of FCF vs earnings. What I think the whole valuation issue comes down to is the "cash earnings", the "return on capital" the company can get from reinvesting it, and the business position (risks). If a company is generating a lot of free cash by standard definitions, it can simply mean that there aren't any reasonable investment and growth opportunities available for it at present. (and vice versa) This is something that is constantly changing. There are also disagreements on what constitutes FC. If a company has NO internal growth opportunities at all, but uses all of its earnings plus more to make an acquisition, then in reality it generated no free cash. Its future growth will come from that form of investment instead of the usual capital spending. Yet I see companies like that referred to as high FCF companies all the time. The food group comes to mind here. I simply try to get at the "real earnings" of a company (accounting) and its prospects for deploying that cash on favorable terms. My 2 cents. :-) Wayne

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