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To: Bill Cotter who wrote (1427)	4/7/1998 11:12:00 PM
From: jbe	Read Replies (1) \| Respond to of 2542

> Bill, in response to your question about MarketGuide/free cash flow, let me simply give you the text of a query I sent to the company on just that point, and the text of the response. It was kind of them to ask me to get back to them, and I am ashamed to admit I never did, especially since I did not quite understand the answer. In any event, bear in mind that not all services use the same method for calculating free cashflow, and that the best methods are too complex for them (and for me) to use. Here's my query: "I use the Market Guide Comparison Ratios religiously. I pay particular attention to the price/free cash flow ratios. And some of the stocks I have bought have lower price/free cash flow ratios than price/cash flow ratios,according to your data. A couple of cases in point: Compaq (p/cf: 26.04;p/fcf: 12.65); Herman Miller (p/cf: 17.16; p/fcf: 12.67); Chicago Rivet & Machine (p/cf: 9.53; p/fcf: 8.80). However, your data has been challenged by a number of people who participate in a Silicon Investor forum I launched, "Free Cash Flow as a Valuation Criterion." They insist that it is NOT POSSIBLE for a company to have >price/free cash flow ratio that is lower than its price/cash flow ratio. And looking at the method you use to calculate free cash flow -- I quote: "it is calculated from the Statement of Cash Flows as cash from operations,minus capital expenditures and dividends paid" -- they would appear to be right. If a company makes NO capital expenditures and pays NO dividends,its free cash flow will be equal to its cash flow, and the p/cf and p/fcf ratios will be identical. But if it makes ANY capital expenditures and pays ANY dividends, it will have less free cash flow than cash flow, and so its price/FCF ratio will be higher than its p/CF ratio. The only way it can be >LOWER is if you ADD something to the cash flow figure (e.g., investment income from securities). But you apparently don't do that. Can you please explain in more detail how you calculate your cash flow/free cash flow ratios, and why, according to your calculations, some companies can indeed have higher price/free cash flow ratios than price/cash flow ratios? I do hope you can respond, for your sake as well as mine. It's bad advertising for you, after all, when investors publicly challenge your numbers and call your competence into question." Looking forward to a reply....." Here's their response: Greetings, Thanks for using our Ratio Comparison reports. When Market Guide decided to calculate the cash flow ratios they were confronted with with two different options. One was to calculate the cash flow ratio based on the cash flow statement and the other was calculating it from the income statement. After further research, Market Guide decided to go with the following calculations: Cash Flow: Net Income - Preferred dividends + depreciation (or similar charges) This calculation was based on the income statement and when depreciation was not available on the income statement we use the number from the cash flow statement. BAsed on this cash flow calculation, the next logical step was subtracting capital expenditures and dividends paid, thus, resulting in a smaller free cash flow ratio compared to cash flow. However, based on further research, Market Guide decided to calculate free cash flow (as you determined) based solely on the cash flow statement. This calculation occasionally results in discrepancies. I apologize if the calculations create a little discrepancy in the results. But it seems that Market Guide adopted two different approaches to cash flow and free cash flow calculation since they were yielding better results that way. Let me know what your take is on this point. We are all ears. EOM