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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Stu R who wrote (35657)	11/29/2000 2:23:47 PM
From: Mike Buckley	Respond to of 54805

Stu and Pirah, The discussion you're having about the importance of free cash flow is somewhat related to Moore's contention that all gorilla candidates in the tornado are profitable. I agree with Pirah that free cash flow is a more accurate measurement of profitability than net income. When the manual states that a company's market capitalization is in effect the net present value of the company's future returns, I also believe free cash flow is a better measurement of those returns than earnings. That's because the ultimate return includes either the liquidation value or the sale value of the company, which of course is measured in cash. Earnings aren't cash. Free cash flow is. --Mike Buckley

To: Stu R who wrote (35657)	11/29/2000 4:23:18 PM
From: Pirah Naman	Respond to of 54805

Hi Stu: The way I read it is that the company has been cash flow positive for the past three years based on its cash flow from operations. It is true that if you reduce the cash flow from operations by the amount of capital purchases it does result in an overall negative cash flow. Free cash flow is cash flow from operations minus capital expenses. See the following (and the followups) for my ramblings on this: Message 13520970 However, the overall negative cash flow has amounted to about $20 million for each of the last two years. Compare this to the $300+ million in cash and the fact the company has no long term debt. This indicates to me a very financially stable company that is expanding at a modest pace relative to its financial resources. Many biotechs have a pile of cash and no long term debt. Of course they are even cash flow negative, making them very free cash flow negative and even worse off. But their being worse off serves to illustrate the issue - they must become profitable before they run out of cash, or get further infusions of cash from investors or larger companies. If they don't... Cree may well have plenty of cash to tide them over until they become truly profitable. The question is when will they become profitable, and how profitable will they become? As for the expansion, I rambled on this before (see above link) so I won't bore people by going over it again. I think that the cash flow from operations is the most important element of the cash flow statement because it points to the fundamental health of the company. My belief is that free cash flow is. Most companies are cash flow positive. But if they are not free cash flow positive, they are dependent upon sources outside operations to fund their operations. Cree may well become very profitable some day. They haven't been profitable to date. That's all I'm pointing out. If somebody is running a small portfolio, the selection of each company is critical. IMO the selection of a free cash flow negative company over a free cash flow positive company should only result if the free cash flow negative company has some pretty strong advantages which can be expected to result in superior free cash flow later. - Pirah