Comments on: 2009 Best Small Companies Part 4

By: Forbes Best Small Companies Final | Old School Value

Forbes Best Small Companies Final | Old School Value — Fri, 19 Feb 2010 07:07:53 +0000

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By: Forbes Best Small Companies for 2009: Part VII | Stocks and Sectors

Forbes Best Small Companies for 2009: Part VII | Stocks and Sectors — Wed, 13 Jan 2010 19:43:23 +0000

By: Forbes Best Small Companies for 2009: Part VI | Stocks and Sectors

Forbes Best Small Companies for 2009: Part VI | Stocks and Sectors — Thu, 10 Dec 2009 12:02:11 +0000

[...] 1 | Part 2 | Part 3 | Part 4 | Part [...]

By: 2009 Forbes Best Small Companies Part 1

2009 Forbes Best Small Companies Part 1 — Mon, 30 Nov 2009 10:08:29 +0000

[...] Forbes 200 Best Small Companies Part 1 | Part 2 | Part 3 | Part 4 | Part 5 Table of Contents:2009 Forbes 200 Best Small CompaniesThe Screening FilterThe List of [...]

By: 2009 Forbes Best Small Companies Part 2

2009 Forbes Best Small Companies Part 2 — Mon, 30 Nov 2009 10:08:00 +0000

[...] Forbes 200 Best Small Companies Part 1 | Part 2 | Part 3 | Part 4 | Part [...]

By: Jae Jun

Jae Jun — Thu, 26 Nov 2009 20:47:52 +0000

The formula for FCF I use at the moment is based on Buffett’s owner earnings where he states that changes in working capital should also be in (c). If you think about it, if a company is required to increase working capital to meet the current demand, that’s really an increase of maintenance capex.

“If we think through these questions, we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)” – 1986 Berkshire letter

Also, since I haven’t found a single person who can accurately judge or calculate maintenance capex, I just use the total capex which will more than offet the working capital required for maintenance.

Some other points is that owner earnings is used to judge the true earnings or cash flow of the company. I just use the phrase FCF more often because most people don’t understand what owner earnings is. So by excluding changes in working capital it may actually be safer in some circumstances because current assets and liabilities are more easily manipulated and can vary by large degrees year to year which won’t provide an accurate picture of the business.

By including changes in working capital you are actually calculating FCFF which shows how much cash flow is available for distribution to shareholders of the company. I don’t believe this reveals the earnings power of an ongoing business because you are only looking at things 1 year at a time and calculating the business as if it will disperse all its cash which is unlikely in any organization.

I should write a post on this in the near future. Great question because it’s been something that I’ve been thinking about for weeks after someone mentioned it as well.

By: Vaidas

Vaidas — Thu, 26 Nov 2009 09:20:40 +0000

Hello Jae,
Great website.. I read it all the time.
One thing bothers me though.. in your Excel FCF valuation sheet you exclude changes in working capital from FCF calculation. I don’t think that is right. I actually changed the formula on my sheet to calculate FCF as CFO-CAPEX (actually CFO+CAPEX because CAPEX is a negative number).
In case of DXPE, you say that they had positive FCF from 2001.. that is not the case if you include changes in working capital. In 2005 and 2006 they had negative FCF. They have been increasing invesntories and receivables every year.. this is a cash outlay, but you do not account for that in your FCF calculation. Do you agree?

Best regards,
Vaidas

By: 2009 Best Small Companies Part 3 | Old School Value

2009 Best Small Companies Part 3 | Old School Value — Wed, 25 Nov 2009 09:34:24 +0000

[...] 2009 Forbes 200 Best Small Companies Part 1 | Part 2 | Part 3 | Part 4 [...]