What metric(s) would you use for determining the fair value of a stock relative to its adjusted free cash flow?
Mike, Unfortunately for me, I have not employed a strict discipline in valuing a stock. However, some methods that I have used before are discounting my guestimate of future free cash flows back to a present value and comparing this present value to today's actual value of the stock. Another indicator I look at is relating the price to free cash flow ratio to the expected growth rate of free cash flows which results in a free cash flow version of the PEG ratio.
Considering that employees are at the core of a company's operations, what is the basis for excluding the cash flow issues directly related to acquiring the employees when trying to arrive at free cash flow generated by operations?
I think the question should be: considering that employees are at the core of a company's operations, what is the basis for companies not including the option's portion of employee's compensation as an operating expense? SEBL is only too happy to report the tax credit resulting from exercised options as a positive cash flow, but not report the option compensation expense that the IRS recognized in granting those options. For more information on this Option Sleight of Hand, see the following article in Fortune including the tables and related articles on the sidebar:
fortune.com
If I remember correctly, you referenced the annual doubling of adjusted free cash flow per share in the context that it would be very unusual to sustain.
In so much as that I would call adjusted free cash flow a better measure of real economic value a company is potentially returning to an owner than is pro forma or gaap earnings, I would think it would be even more difficult to double adjusted free cash flow every year for eight years (as per my example) than it would be to double earnings for eight years. However, I can't say I have studied all our Gorillas to determine whether any of them have ever doubled adjusted free cash flow for eight consecutive years and I could be wrong. Ardethan, did the mighty Softie ever double adjusted free cash flows every year for eight years?
I want to make it clear that I called this figure we have been bandying about "adjusted" free cash flow because we "adjusted" the free cash flow. However, I don't believe the expression adjusted free cash flow has any formal recognition or stature. So if any of you use the expression and are met with a blank stare this may be why. In addition, as Pirah has noted, there are often other adjustments to free cash flow that can be made with good reason when trying to determine the proxy for "owner earnings from operations", which is really the purpose of the free cash flow calculation.
Best, Huey |
