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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: cfimx who wrote (518)	10/26/1998 5:44:00 PM
From: jhg_in_kc	Read Replies (3) \| Respond to of 4690

What is this thread buying just now? Opportunities are slipping through your fingers while you debate valuation techniques. jhg

To: cfimx who wrote (518)	10/27/1998 12:13:00 AM
From: James Clarke	Read Replies (1) \| Respond to of 4690

year to year free cash flow growth is a wonderful tool in theory, but you are going to have a tough time putting it into practice except for a tiny number of businesses which are already way overvalued. Free cash flow is what I use to value companies, don't get me wrong, but it tends to be a somewhat choppy number even for the best companies. i.e. year over year growth can look very different one year to the next. What I like to do is look at five or ten years of free cash flow and just get a gut feel for the trend. If I understand the business, I then like to play with the free cash flow number and try to back out investment for growth to get a feel for what I am paying for the business as it exists today. This works best for low-growth cash cows. I agree with you that for a Coca-Cola, what you want to get a handle on is the long term trend in free cash flow growth. Why is the cash flow statement important? Because earnings are not hard to doctor. To doctor the free cash flow number, you almost have to commit fraud. If Sunbeam investors had even glanced at the cash flow statement, they would have saved themselves a lot of money. Likewise Cendant (I can't tell you how many times I heard that Cendant was a "cash machine", but whenever I looked at the business - I ALWAYS look at the cash flow statement first, and rarely spend much time on the income statement - Cendant just did not measure up.) You would be surprised how few professional investors really understand cash accounting, because most of them are so focused on quarterly earnings numbers. Jim