Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Free Cash Flow as Value Criterion -- Ignore unavailable to you. Want to Upgrade?

To: jbe who wrote (92)	11/2/1997 11:51:00 AM
From: Andrew	Read Replies (2) \| Respond to of 253

Joan, "Why not? If you can have great cash flow with lousy free cash flow (my favorite example being the oil drillers), why can't a company with good cash flow (here I'm not saying lousy) have much better free cash flow, relative to the price you are paying to buy its stock? For example: if a company has no capital expenditures at all, and all the other companies do, its price/FCF ratio is likely to be lower than its price/CF ratio. I have a long list of companies whose price/FCF ratios are lower than their price/CF ratios. Of course, it was garnered from sources that you consider suspect." I think what Pirah is saying is that since FCF = cash flow - cap. exp., FCF can never be larger than CF. Therefore, it's impossible to have a P/FCF which is lower than the P/CF. In your example of no cap. exp., it's entirely possible that the P/CF of the company may look the same as everyone elses, but have a much more impressive P/FCF than everyone else. However, this doesn't change the fact that it's mathematically impossible for the P/FCF to be lower than the P/CF. If it appears that way, your source is either using a different definition of FCF than you are, or has garbled the numbers. Company A Price: 10 CF: 5 FCF: 1 P/CF: 2 P/FCF: 10 Company B Price:10 CF:5 FCF:4 P/CF: 2 P/FCF: 2.5 Much more tempting P/FCF, but still higher than it's own P/CF. Andrew

To: jbe who wrote (92)	11/2/1997 3:59:00 PM
From: Pirah Naman	Respond to of 253

jbe: > irah, you write: "Impossible to have great free cash flow without great cash flow." Why not? jbe, you gave the answer yourself in the very first paragraph of this thread. free cash flow is defined as cash flow MINUS something. free cash flow can not be higher than cash flow. > before concluding that the sources I have been using are "clearly wrong " you might check them out first yourself. If I blindly believed VL or S&P than this would be in order. But as I have repeatedly mentioned I have checked these against the original documents filed by CPQ, among others. Pirah