We are now looking at free cash flow and it's various interpretations and uses. We have gathered that operating profit and cash flow are not the same, and are working out how this can be broken out into useful figures.
One means of breaking down cash flow contributions it seems is as follows:
Net cash from operations
Net cash from investing
Net cash from financing
these of course added together, yielding an amount equal to the final change in cash, i.e. how much the firm can retain, or how much it must find.
However some of the most useful measures are entities like FCFF (free cash flow for the firm) and FCF (free cash flow for the shareholders). I'm trying to get my head around those as they lead towards my current quest FCFps (free cash flow per share).
Again looking at Phil Oakley's "How to pick quality shares" (pages 45, 76), and again looking at the Dominos example, for 2015, Phil's worked example toward FCFps starts as follows:
Dominos Free cash flow per share calculation 2015(£m)
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Net CF from operations 69.0
Capex [6.8]
Dividends from joint ventures 0.5
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Free cash flow to the firm (FCFF) 62.7
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...
...
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What I can't understand/justify why (in Phil's DOM example, and presumably this is true in general), is why FCFF isn't calculated as simply this:
FCFF = Net cash from operations + Net cash from investing
where in DOMs case from the above year it would leave us a value of less, it would 58 or thereabouts. If you look in the relevant section in the AR for that year (Page 77 of https://investors.dominos.co.uk/system/ ... r-2015.pdf), you can see:
(figures in £000)
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Net cash generated by operating activities 68975
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(Cash flows from investing activities)
Interest received 191
Dividends received from associates 490 *
Decrease in loans to associates and joint ventures 542
Decrease in loans to franchisees 2174
Payments to acquire finances lease assets [93]
Receipts from repayment of franchisee leases 1288
Purchase of property, plant and equipment [6763] *
Deferred consideration for Domino's leasing limited [3517]
Purchase of other non-current assets [5267]
...
...
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Net cash used by investing activities [10995]
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(Cash inflow before before financing 58020)
...
...
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Putting my question another way "why is it that to arrive at FCFF from Net Cash generated by operating activities we only need to make adjustments (according to Phil's book) due to Dividends received from associates and Purchase of PPE (capex)?". For example, why is an increment for interest received and likewise a decrement for purchase of other NC assets not made?
Whilst, we don't want to make our quest any more difficult than it needs to be (IOW an equivalent FCFF formula using ingredients extracted from a typical AR, would be nice), we do want to get a full grasp of this concept (FCFF) inorder to be able to calculate FCF and then FCFps, apropos future purchases of holdings in other firms.
many thanks, Matt and Mel
PS. this very long url, links to one or two of the relevant pages in Phil's book:
https://books.google.co.uk/books?id=L_7 ... ff&f=false