Free Cash Flow - The Best Valuation Metric

By: Ian Campbell | Tue, Oct 2, 2012
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Why Read and Watch: Because Free Cash Flow is indeed the best valuation metric for established companies that generate cash flow from operations.

Featured Article and Video: A recent short article with an accompanying video purports to explain what 'free cash flow' is, and why and how it is important as a business valuation metric. On balance, the video does quite a good job of this - and hence is worthwhile watching and listening to.

Commentary: This article and video provides a quick overview to a very important topic that all investors (less so short-term traders) ought to know about and understand. Certainly the discounted after-tax free cash flow valuation methodology is the principal one relied upon by sophisticated companies in their acquisition analysis.

That said, the video presentation suggests that 'free cash flow' is defined as the result obtained for any given fiscal period when all capital expenditures incurred during that period are deducted from recurring operating income generated in that period. That is:

Recurring Operating Income - Total Capital Expenditures

=

Free Cash Flow

That is overly simplistic, and as both a theoretical and practical matter incorrect. This is because:

Four final comments:

Video: Everything You Wanted To Know About Free Cash Flow

Source: Investing Answers, Even Perra and Luke Stenis, June 14, 2012. Reading and viewing time: 3 minutes.

 


 

Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Economic Straight Talk

Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
* Canadian Institute of Chartered Business Valuators
** through The Ian R. Campbell Research Initiative

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