Aha, finally, another free cashflow freak!
In buying stocks, one of my major criteria is good free cashflow.(That's how I happened on this thread: Unitrode has fair --not great -- free cashflow, and it scores very high on other criteria.)
But I don't have the knowledge or the skill to calculate future (discounted) free cashflow. So I rely on present free cashflow per share numbers, as well as on the price/free cashflow ratio. Using the latter criterion, some companies that look overvalued when you look at their price/earnings ratios alone look undervalued when you look at their price/free cashflow ratios. (One of my favorites, Miller Herman, belongs to this category.)
But there is a major problem with all free cashflow measures. And that is that they do not -- and cannot -- reflect which of a company's capital expenditures are necessary to sustain the business (and hence should be deducted from operating cashflow) and those that are not "necessary" (and hence should not be deducted). That's something you can only figure out when you know the company very well.
In any event, a question for you: does using the free cashflow per share and price/cashflow ratio give me a reasonably accurate picture of the free cashflow picture, or not? And should I dump a stock when its free cashflow situation reverses itself radically in a short time (e.g., Oxford Health Care -- OXHP -- which has gone from a very positive free cashflow situation to a very negative one in two short quarters)? And what do you think about starting a free cashflow freaks thread?
Thanks in advance for your reply. |
