Comments on: EBITDA or FCF to Measure Cash Flow

By: Working capital in Free Cash Flow FCF Calculation

Working capital in Free Cash Flow FCF Calculation — Fri, 27 Nov 2009 08:19:03 +0000

[...] This is exactly why I believe Buffett calls his modified FCF formula as owner earnings. The true earnings of a company. He publicized the formula to combat the non-effective and rather misleading EBITDA definition of profitability and cash flow. [...]

By: Jae Jun

Jae Jun — Sat, 18 Apr 2009 07:35:50 +0000

Figuring out the amount of maintenance capex is the difficult part and very time consuming so I usually skip it. I find it easier to be conservative and get the no brainer value stocks rather than try to calculate the growth aspect. I dont mind missing out on the Google’s Walmart’s and Microsoft’s.

By: PlanMaestro

PlanMaestro — Fri, 17 Apr 2009 21:09:40 +0000

I will argue that the main drawback of FCF is the difficulty of estimating “maintenance CAPEX”. Most people use FCF with total CAPEX leading to miss growth stories or invest in business with shrinking moats.

For example, retailers in their early stages (TRLG, H&M) usually have very negative total CAPEX FCF because they are opening stores. On the other extreme, mature retailers (Wal-Mart, Walgreen, Starbucks) could hide operational or competitive problems. They could just stop investing and that automatically increases FCF. That is a reason why store metrics like same store sales and new openings are important.

That could lead to a whole discussion Lampert’s strategy for Sears Holdings SHLD, but space is limited.

By: Weekly Links: April 12, 2009 | Dividends Value

Weekly Links: April 12, 2009 | Dividends Value — Sun, 12 Apr 2009 10:33:27 +0000

[...] Old School Value presented EBITDA or FCF to Measure Cash Flow [...]

By: Greg

Greg — Wed, 08 Apr 2009 12:17:50 +0000

Yeah, I agree with your thoughts. I rarely if ever look at EBITDA but I will always look at FCF. It’s much harder for a company to manipulate FCF to try to appear healthy when they aren’t. I tend to look for dividend stocks with low debt so I also always look at the quick or current ratios along with the payout ratio. High debt or dividends that aren’t supported by earnings are big red flags for me.

Greg’s last blog post..Quicksilver Gas Services – KGS

By: Mark

Mark — Wed, 08 Apr 2009 01:58:27 +0000

“unreliable over a single period. FCF is a raw number showing how much cash is left after expenditures with no smoothing out and FCF tends to fluctuate widely for non predictable cash cow companies.”

I was going to post about the same thing. …Tons of companies don’t even have FCF let alone cash from operations. Also the more variables you look at the less likely you are to get an accurate prediction. Unless you Buffett or valuing a monopoly like company

Mark’s last blog post..IIT, Pier Earnings, AERG Rockets

By: Jae Jun

Jae Jun — Tue, 07 Apr 2009 17:40:22 +0000

I see the downside with FCF being that it is unreliable over a single period. FCF is a raw number showing how much cash is left after expenditures with no smoothing out and FCF tends to fluctuate widely for non predictable cash cow companies.
So the main disadvantage is that it is unable to accurately provide a picture for growth, start up and cyclical companies.

My opinion is that Wall Street uses P/E and EBIT or EBITDA because of its simplistic nature. Most professionals probably dont do near as much research and study than the average investor as they are pressed for time and deadlines. FCF isn’t included in the financial statements which takes time to calculate.

When I first started this blog I had an argument with a person that explains why the public do not use the proper metrics.

There’s many reasons why wall street doesn’t use CROIC, mainly because it only makes some sense in some areas. PE, FPE, EPS, all better indicators of a stocks past and probably future performance. In the end you used flawed variables, flawed methodology, and flawed logic to calculate a flawed result — your valuation for AAPL. And why is it flawed? Well, because those aren’t the numbers most people care about when investing in Apple, and it does absolutely nothing to factor in future shifts-in-market and so on.

By: Sivaram Velauthapillai

Sivaram Velauthapillai — Tue, 07 Apr 2009 17:01:11 +0000

Not saying that FCF is bad (I actually look at that a lot) but just to play Devil’s Advocate…

So what’s the downside to using FCF? Why doesn’t everyone on the Street use FCF? If it was so much superior how come the market relies on earnings instead? For instance, P/E ratio is far more popular than P/FCF ratio.

I’m just curious because many value investors seem to emphasize FCF but very few professionals analysts seem to concentrate on it. Is there something irrational about the market or is there some major pitfalls with FCF…Just wondering why…

Sivaram Velauthapillai’s last blog post..Not a pretty sight: Third Avenue sues MBIA

By: Tony F.

Tony F. — Tue, 07 Apr 2009 05:28:21 +0000

I’d argue, that problem with Berkshire’s textile mills was not that it was capital extensive, but rather that product was undifferentiated on the market place. This in turn caused non-existent pricing power and ultimately very low return on the invested capital. Any plant improvement quickly matched by the competition and margins got erased.

By: Mark

Mark — Tue, 07 Apr 2009 01:11:54 +0000

yeah, really cant beat free cash flow. this stock at net cash took off today aerg i put it on a watch list but missed it. well i should say it was at net cash : )

Mark’s last blog post..IIT, Pier Earnings, AERG Rockets