Free Cash Flow Calculation

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What does Buffett use for valuation?Free cash flow!

Therefore, you only need to solve the problemFree cash flowYou can easily use the Buffett-style valuation method!

However, the current financial report is not ready-madeFree cash flowData, which has become the target of many value investors.Free cash flowThe main reason for the prohibitive valuation is that. Based on the experiences of many materials and other value investors, the author draws a conclusion:

Free cash flowData can be obtained easily!

Free cash flowDivided into companiesFree cash flow(Fcff) and equityFree cash flow(Fcfe), the economic significance of fcff is: the maximum cash flow attributable to shareholders and creditors; fcfe is the maximum cash flow attributable to shareholders.

The original formula is:

CompanyFree cash flowVolume (fcff) = (net profit after tax + Interest fee + non-cash expenditure)-additional operating capital-capital expenditure

Many people are stunned by the formula that spans the three financial statements.Free cash flowIt is too complicated and does not agree. My opinion is that, in view of the complexity of the financial accounting process, we should base on the "Cash Flow Statement" provided by the company's financial report to obtain relevant data instead of collecting data for calculation.Free cash flowBecause the data is extracted by yourself, it will miss a thousand.

By checking the note of the "Cash Flow Statement": "Adjusting the net profit to the cash flow of business activities", we can draw a clear conclusion:

Fcff = (net profit after tax + Interest fee + non-cash expenditure)-additional operating capital-capital expenditure

   = Net cash flow arising from business activities-capital expenditure

I have read the relevant information and no one has raised too many questions about this conclusion. However, there are two issues to be discussed:

I,About capital expenditure

Most people only consider the net outflow of cash from fixed assets and ignore the net outflow of investment cash. In fact, for investment-dominated controlling companies and financial companies, the net outflow of investment cash is the largest. Therefore, the net cash flow produced by investment activities should be used as the indicator of capital expenditure (the net outflow amount is negative)

Therefore: fcff = net cash flow generated by business activities + net cash flow generated by investment activities

II. Funding activities

However, I believe that fcff is not the final value of cash that enterprises can use freely. The reasons are as follows:

ProposalFree cash flowThe concept is to deduct the cash that can be freely allocated to shareholders and creditors after the capital expenses necessary to ensure the company's original profitability. However, when an enterprise raises funds (issuing bonds), the "Capital Expenditure" may be used by new cash instead of cash generated by business activities, after the cash generated by the business activities is distributed to the shareholders as dividends, the enterprise cannot use them. Therefore, the cash that the enterprise can freely master must be added with the "net cash flow generated by financing activities "! If we define the cash that can be used freely by this enterprise as a super companyFree cash flow(Sfcff), then:

Sfcff = net cash flow generated by business activities

+ Net cash flow from investment activities

+ Net cash flow arising from funding activities

= Net increase in cash and cash equivalents

= Period-over-period comparison of currency and cash in the balance sheet

So,Free cash flowIs it fcff or sfcff? The answer is fcff, because we proposeFree cash flowThe original intention of discount is to correct the enterprise's business results under the accrual system. Therefore, our goal is only related to the business results.Free cash flowFcff does not involve any cash flow from funding activities. For this point, we all agree with the information we have obtained.

Controversial:Calculate equityFree cash flowWhen fcfe is used, do you need to consider the cash flows produced by financing activities?

About equityFree cash flowIs:

Fcfe = fcff-non-equity cash flow

= Fcff-interest fee-(repayment of principal-cash borrowed)-preferred shares and minority shares dividend

In this formula, we can see that fcfe involves cash from some funding activities. I think there are three situations to understand:

1. When the repayment of the principal <borrowed cash: it increases the operating cash flow and exaggerated the operating performance, which is not desirable;

2. When the repayment principal = the cash borrowed: no adjustment is required

3. When the principal is returned> the cash borrowed: because the loan principal has never been included in the operating cash flow, it cannot be paid using the operating cash flow.

Therefore, the fcfe formula should remove the (repayment of the principal-borrowed cash), which is also in line with our full investment assumptions, that is, the payer uses a fixed interest Acquisition Method for investment. Changes in the amount of investment are not included in changes in the operating cash flow.

In this way, the equity of zhengdao sharesCash Flow CalculationThe formula is changed:

Fcfe = fcff-interest fee-preferred shares and minority shares dividend

Another controversial point is that: Does interest cost mean long-term interest fees? I think this is wrong. Some people think that the short-term interest will be paid back in the current year, and the return from the operating cash flow should be only the long-term interest. In fact, one assumption of the company's operating cash flow is full investment, that is, equity investment and Creditor's Rights investment. Therefore, no matter whether the long-term short-term interest is paid back in the current year or later, it is credit income, are you sure you want to add them back? Isn't the amount of interest that has been paid off has increased the cash flow falsely? In fact, in the cash flow generated by financing, it is removed together with the shareholder's dividend. Therefore, when calculating fcfe, We need to deduct all the interest fees, rather than finding long-term interest fees. In addition, when I checked the statement that adjusted the net profit to the cash flow generated by the business activities, I found that not only the interest fee, but all the financial expenses are added together. I understand that all financial fees are considered as interest fees. Finally, zhengdao shares are calculated as shares.Free cash flowThe final formula is:

Fcfe = fcff-financial fees-preferred shares and minority shares Dividends

In this way, both fcff and fcfe can be easily obtained in the cash flow statement and the attached table.

ObtainedFree cash flowYou can easily use Buffett's valuation method.