Remove ads

Introducing the LemonFools Personal Finance Calculators

Free cash flow, it's applications and how they are calculated

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
Lemon Slice
Posts: 814
Joined: March 7th, 2018, 8:14 pm
Has thanked: 644 times
Been thanked: 82 times

Re: Free cash flow, it's applications and how they are calculated

#150707

Postby TheMotorcycleBoy » July 7th, 2018, 11:26 am

Dod101 wrote:For me what I want to see is that reported profits are more or less equal to free cash flow

Apologies for repeating my quoting of you, Dod!

Actually the one thing in some of the books, which is similar to what you've just said, is the ratio of "Cash flow from operations" / EBIT. Which they recommend, as you say, to being as close to, or perhaps even slightly more than 1.

Matt

TheMotorcycleBoy
Lemon Slice
Posts: 814
Joined: March 7th, 2018, 8:14 pm
Has thanked: 644 times
Been thanked: 82 times

Re: Free cash flow, it's applications and how they are calculated

#150737

Postby TheMotorcycleBoy » July 7th, 2018, 1:43 pm

cshfool wrote:Hi M&M -

Yes correct I mean the Phil Oakley book, which I'm working through, partly based on your useful notes here. A very interesting read, though there do seem to be some slightly annoying typo/ inconsistencies for the forensically inclined reader seeking to do their own sums, eg compare the Doms 2015 change in working capital pg 45 of 6.4 with the 2015 change in working capital of 10.7 pg 52- the issue seems to be the 4.4 provisions. Despite that he gets the same bottom line Cash from operations of 80.4 so some typos going on, possibly to do with the publication process. Nevertheless some good stuff here as far as I can tell, and an interesting and new voice.

I was previously impressed by Phils identification of Carillion (see Investors Chronicle, March 10, 2017) as a value trap likely to implement a substantial cut in its dividend based on FCF, doubtful EPS growth through acquisition, pension liabilities etc. prior to final implosion. I identified CLLN as a sell here based on my own meagre workings from other directions, (with a gang of shorting hedge funds admittedly) but its nice to find another thinking black sheep.

Check out Terrys "Fundsmith" site and some of his vids at his annual backslap, his "Accounting for growth" book is worth a look too.

thanks for your worked contributions (the detailed calculations are helpful) and for pointing to this book,

csh

Remember my initial suspicion of Phil's method of reducing FCFF with only net interest charges to arrive at FCFE? Where upon he then divides by number of shares in order to reach FCFps.

Do it Phil's way, and get 12.37p per share for DOMs as of their y/e of 2015.

MorningStar, however, would have you believe, it's actually 10p for this period...
http://financials.morningstar.com/ratio ... ture=en-US

So I took the -16.3M repayment cost which Phil doesn't mention, and the +5.7M new borrowings, and netted them together then punched this new data in my spreadsheet, and lo and behold I too arrive at 10p FCFps. I'm started to find I've been shortchanged by Phils review of Cash flow, if you'll pardon the pun.. :lol:

Matt

ADrunkenMarcus
Lemon Slice
Posts: 431
Joined: November 5th, 2016, 11:16 am
Has thanked: 31 times
Been thanked: 78 times

Re: Free cash flow, it's applications and how they are calculated

#150985

Postby ADrunkenMarcus » July 8th, 2018, 8:38 pm

Melanie wrote:Been applying this to a couple of prospective buys. Just applied to Spirax-sarco, looked alright 2014-2016, but seems that the numbers go south from 2017 (some acquisitions diluting value, in my incredibly naive/newbie opin).


I should declare an interest as I hold Spirax Sarco Engineering and it's more than doubled my money on a total return basis since March 2015. They did undertake a large acquisition in 2017, however I'd still suggest keeping an eye on the company and I think free cash flow will improve substantially over the 2017 figure. It's averaged about 23% ROCE since 2000 (calculated by me on an unadjusted basis) and even in 2017 it was over 16% which is far better than the vast majority of companies. The dividend growth record is also very strong over a very long period.

Best wishes

Mark.

TheMotorcycleBoy
Lemon Slice
Posts: 814
Joined: March 7th, 2018, 8:14 pm
Has thanked: 644 times
Been thanked: 82 times

Re: Free cash flow, it's applications and how they are calculated

#151257

Postby TheMotorcycleBoy » July 9th, 2018, 7:10 pm

ADrunkenMarcus wrote:
Melanie wrote:Been applying this to a couple of prospective buys. Just applied to Spirax-sarco, looked alright 2014-2016, but seems that the numbers go south from 2017 (some acquisitions diluting value, in my incredibly naive/newbie opin).


I should declare an interest as I hold Spirax Sarco Engineering and it's more than doubled my money on a total return basis since March 2015. They did undertake a large acquisition in 2017, however I'd still suggest keeping an eye on the company and I think free cash flow will improve substantially over the 2017 figure. It's averaged about 23% ROCE since 2000 (calculated by me on an unadjusted basis) and even in 2017 it was over 16% which is far better than the vast majority of companies. The dividend growth record is also very strong over a very long period.

Best wishes

Mark.

Yes, we're definitely keeping an eye on this one. I read a recent presentation of theirs, and it's quite possible that the acquisitions were well guided.

M&M

TheMotorcycleBoy
Lemon Slice
Posts: 814
Joined: March 7th, 2018, 8:14 pm
Has thanked: 644 times
Been thanked: 82 times

Re: Free cash flow, it's applications and how they are calculated

#156180

Postby TheMotorcycleBoy » July 30th, 2018, 6:55 pm

Am I still finding all this cash flow stuff quite interesting. These 2 clips describe how the cash flow statement can be derived from comparison of the current and previous year's balance sheets along with the income statement.

https://www.youtube.com/watch?v=m_vL50Y4_ao (part 1)
https://www.youtube.com/watch?v=PUmd_l_BYXE (part 2)

Kind of interesting to see how each of the 3 statements are related to one another.


Return to “Company Analysis”

Who is online

Users browsing this forum: No registered users and 0 guests