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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (94)	3/18/1998 7:27:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

Wayne on FCF. >At the end of the day, it tells you how much cash would be left in >your pocket if you owned the company outright. For people from, say, >Omaha, that's not an unimportant point to ponder. Free cash flow and/or cash earnings are very important in valuation calculations. However, as stated by Reynolds, if a company has terrific growth opportunities for say the next 5 years, it should reinvest all earnings. This would make the company have zero free cash flow in the first few years. In these cases, the value of the business is determined by the much higher free cash flow levels that theoretically will be there in the future when the capital spending requirements and growth opportunities are lower. Summed up: A company should always invest as much money as makes sense at as high a rate of return as possible without regard for FCF measurements. That will maximize earnings per share and FCF in the future. From a much higher EPS level, FCF will be much higher when the growth opportunities are no longer available. Here is a numerical example of what I am talking about. Company 'A' EPS FCF 2.00 1.80 2.10 1.85 2.10 1.85 2.20 1.90 2.25 2.00 2.40 2.10 Company 'B' EPS FCF 2.00 0 2.40 0 2.75 0 3.10 0 3.50 0 4.00 3.0 A long term investor would be better off owning company 'B' even though there is no Free Cash for the first 5 years.