I would say that the Investment Strategy that Buffett uses, as presented by David Clark, is likely to provide one with a far more rewarding end result than calculating Future Cash Flows I think you're right.
Accrual accounting (without manipulations or adjusted for these) tends to put
the valuation closer in time. In the long run (even if we're all dead), free cash flow will equal net earnings.
On DCF :
An other problem with DCF valuation is that it's a liquidation concept: we need to subtract capital expenditures to get FCF. Fast growing businesses invest heavily and, in most cases, have negative FCF. With negative FCF less value is recognized in the immediate future and it puts more speculation in the valuation process.
I find the solution of decreasing capital expenditures to arrive at the "maintenance expenditures" weird. The "growth expenditures" not deducted from cash flow from operations will never be subtracted in the future. The only way to make this adjustment less "wrong" is to use depreciation for "maintenance expenditures" but it's not a good measure in many cases. The solution to this problem spreads or amortize the growth expenditures in the future and make the cash flow picture less clear. Funny to use an accrual accounting concept to adjust a cash accounting measure.
When this fast grower start to harvest his past investments and reduce capex, the capex can be under the reported depreciation amount. At that moment, many just switch to the old method that, now, provide the higher FCF number.
Anyway, I don't use DCF analysis.
Nonetheless, I find the Cash Flow Statement still useful.
Good investing
liam |
