FCF and WC
Posted: October 15th, 2020, 10:54 pm
Hi All,
FCF/MV or FCF/EV are great value metrics, since using free cash flow instead of reported profits can be a good way to avoid overstated profits that are not backed up by real cashflows.
However, working capital movements can be very lumpy and potentially over/understate the true level of "sustainable" or normalised free cashflow. Take a look at the cashflow statement in PZ Cussons latest annual report and you'll see what I mean.
Does anyone have any expert knowledge of whether FCF ex Net Change in WC is therefore a sensible alternative approach? Its not the same as EBITDA since there are still various non-cash charges/gains/write offs that pass through the p&l that FCF removes, separate to WC (inventory, receivables, payables, paid expenses).
Thanks
Steve
FCF/MV or FCF/EV are great value metrics, since using free cash flow instead of reported profits can be a good way to avoid overstated profits that are not backed up by real cashflows.
However, working capital movements can be very lumpy and potentially over/understate the true level of "sustainable" or normalised free cashflow. Take a look at the cashflow statement in PZ Cussons latest annual report and you'll see what I mean.
Does anyone have any expert knowledge of whether FCF ex Net Change in WC is therefore a sensible alternative approach? Its not the same as EBITDA since there are still various non-cash charges/gains/write offs that pass through the p&l that FCF removes, separate to WC (inventory, receivables, payables, paid expenses).
Thanks
Steve