Gengulphus wrote:Melanie wrote:Year 2013 2014 2015 2016 2017
...
FCFps (in GBP) 0.107 0.088 0.173 0.176 0.167
Diff -0.0185 0.0846 0.0035 -0.0096
Growth rate of FCF -0.173 0.955 0.0204 -0.05434
The average growth of FCF = 75%
I'm not quite certain what you did there to produce that figure of 75%, but it's definitely wrong. My best guess is that it's the sum of the "Growth rate of FCF" row, interpreted as a rounded-to-whole-number percentage. But that's wrong in two respects: it's a sum rather than an average, and the appropriate type of average for growth rates over consecutive years is not the normal average (which would differ by a division by 4 and so be 19%) but their CAGR. In this case, it comes out as FourthRoot(0.167/0.107) - 1 = 0.12 rounded to two decimal places, or 12% in percentage terms. So really a lot smaller than 75%!
To see why the normal average is not appropriate, imagine that the FCFps values for 11 consecutive years were 1, 2, 1, 2, 1, 2, 1, 2, 1, 2, 1. The corresponding yearly growth rates are 100%, -50%, 100%, -50%, 100%, -50%, 100%, -50%, 100%, -50% and their normal average is 25%, while their CAGR is 0%. The latter much better reflects the fact that it's basically just fluctuating from year to year, not growing. And especially when compared with what the FCFps sequence would be if it really were growing at 25% each year: 1, 1.25, 1.56, 1.95, 2.44, 3.05, 3.81, 4.77, 5.96, 7.45, 9.31 - IMHO clearly far better than 1, 2, 1, 2, 1, 2, 1, 2, 1, 2, 1!
Gengulphus
Hi Geng, I can't spend too long on this post, as I've just started the day job, and have vowed to really get my head down this week.
Essentially I extracted the FCFps for 5 years, i.e. 0.107,0.088,0.173,0.176,0.167. I then formed 4 sets of adjacent pairs from the 5 datas, in the form of (FCFn+1,FCFn), where n is the year number reference. So then I arranged into difference terms i.e.
diffn = (FCFn+1) - (FCFn)
and in doing so I arrived that:
0.088 - - 0.107 = -0.019
0.173 - 0.088 = 0.085
0.176 - 0.173 = 0.003
0.167 - 0.176 = -0.009
Then armed with the diffs above, I divided each by the FCFn value i.e. the earlier year's value, so:
-0.019 / 0.107 = -0.1776
0.085 / 0.088 = 0.956
0.003 / 0.173 = 0.017
-0.009 / 0.176 = -0.051
Now what we have is 4 discrete growth rates for periods 2013-14, 2014-15, 2015-2016, 2016-2017.
Which summarise to 0.745. And then.......dammit!!......you're dead right.....I forgot to divide by 4 to form an average!! (Very embarrassing )
if I had remembered I would then I have divided by 4, and arrived at 0.19 or 19%.
Yup. Silly me. That's the problem with multitasking all my weekend chores and responsibilities with looking at figures I suppose....
But regardless, what I did it the end, was to ignore the forecast of FCFps growth rate and just use current inflation rate (2.5%) which probably give rise to a more conservative valuation.
Thanks for spotting this Geng, I'll read yours and other posts tonight. And apologies for scrappy notes above! I've gotta dash.
Matt