Comments on: Discounted Cash Flow & Stock Valuation

By: Financiallogic

Financiallogic — Thu, 03 Feb 2011 10:48:31 +0000

Guys,

Thanks for this wonderful website. I have a strong doubt in my head and will be glad to hear your thoughts on this. I am not sure if this is the right thread to put this doubt on so please bear with me. Please find below my question –

For company X, in year 2007:
• CFO = 50
• PPE capex = 20
• Long-term financial investments = 5
• Sale of equipment = 10
• New debt raised (and left idle in 2007) = 10
• New equity raised (and left idle in 2007) = 15
• Interest paid = 10
• Dividend paid = 5

What is FCF, owners earnings, FCFE and FCFF for 2007?

I ask this question because I have not seen literature that explicitly talks of:
A. Treatment of Non PPE capex such as long term financial investments when calculating FCFF
B. Treatment of cash raised in the year under consideration but left idle for the purpose of calculating FCFF

By: Jae Jun

Jae Jun — Tue, 06 Oct 2009 20:58:37 +0000

@ Ron

I prefer to use the Buffett’s definition of owner earnings which is why i don’t include cash from other operations. I want to know how much cash was generated from the business itself rather than taxes, property and equipment sales etc.

A lot of other income are one time occurrences which means that if you just take it for granted, you’ll be in for a surprise the following year.

By: aviad123

aviad123 — Tue, 06 Oct 2009 19:24:02 +0000

Hi Jae,

Its a great blog you have here!

I checked the spreadsheet that you offer, and it looks very good. Before buying it, i just wanted to know how do you calculate FCF. I saw that you’re FCF is different from the FCF in morningstar (which is operating CF minus CapEx). what are you subtracting from this to get your FCF?

Thanks!
Ron

By: Dave

Dave — Wed, 29 Jul 2009 12:17:40 +0000

Hi Jae

Just as an quick teaser, have you ever compared the premium spreadsheet model to that outlined in Hagsrtom’s book, The Warren Buffet Way, on page 126? Both models and up with different valuations by high margins.

All the best

Dave

By: Zsolt

Zsolt — Fri, 27 Mar 2009 14:54:52 +0000

I notice some investor perform a DCF tied to FCFE (and including dividends) when determining whether to invest. Is this a wrong approach?

By: Jae Jun

Jae Jun — Sat, 27 Dec 2008 18:34:09 +0000

Exactly. There are arguments that FCF can also be manipulated and it is true to a small degree, but while manipulation of earnings can go on for several years, the truth always comes out sooner than later if FCF is reworked.

I’m writing a post on FCF at the moment.

By: Dividend Tree

Dividend Tree — Sat, 27 Dec 2008 03:50:48 +0000

JJ: I like use of free cash flow in DCF models. It gives a realistic value of the business enterprise. PE ratios, EPS, etc are all open to interpretation. FCF is fact – no multiple interpretation…….

Dividend Tree’s last blog post..Market Collision affecting Dividend Investors – Concluding Part

By: Jae Jun

Jae Jun — Tue, 16 Dec 2008 17:47:13 +0000

@D4L,
I too like the DCF because it forces me to think about the cash of the business rather than get caught up with quarterly EPS performance.

@Mark,
thanks

By: Mark

Mark — Tue, 16 Dec 2008 06:24:07 +0000

Good post on the importance of discounted cash flow and its use in determining the value of a business.

Mark’s last blog post..Goldman Sachs

By: Dividends4Life

Dividends4Life — Mon, 15 Dec 2008 23:31:27 +0000

Very nice write-up. I love DCF models. On a daily basis, emotion drives a stocks price. However, over the long-term, it is expected cash generated that defines its price.

Best Wishes,
D4L

Dividends4Life’s last blog post..Stock Analysis: Donaldson Company, Inc (DCI)