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09-05-2013, 09:16 AM
Extract: FCF:
In addition to being the most useful metric for investors, free cash flow is also the metric that enables a company’s management team to review and select the best possible options for the generation of shareholder value in light of the firm’s cost of capital. Therefore, when engaged in the process of security selection, it is necessary for investors to look not only at the quantity and quality of the company’s Free Cash Flow, but also the manner this free cash Flow is deployed by management.
From the perspective of a company’s management team, there are only 5 possible uses of Free Cash Flow:
1. Cash dividends
2. Stock repurchases
3. Debt reduction
4. Acquisitions
5. Reinvestment in company capital projects.
Every conceivable option for the allocation of a dollar of Free Cash Flow use falls into one of these 5 applications. Often management will employ some of each, but we see a distinction between the first 3 uses and the latter 2. We believe that unless the return on incremental capital is superior to the firm’s cost of capital, (Bank’s Interest Rate), there is little point in pursuing option 4 (making acquisitions) or option 5 (reinvesting in the business beyond maintenance capital expenditures.)
So, when and if acquisitions and reinvestments fail to generate sufficient returns, free Cash Flow should be returned to shareholders via one of the first 3 options.
These first 3 possible uses of Free Cash Flow (cash dividends, stock repurchases and debt reduction) are all effectively dividends payable to shareholders. Therefore, we refer to these 3 options collectively as Shareholder Yield.
Question:
All the above and much, much more we can get from reading. So what?
Have i try to put into practice? i have not. Even if i want to put into practice, How to go about it? Read AR as much as possible?
Anyone has a procedure or a good practice to ensure FCF is real?
In addition to being the most useful metric for investors, free cash flow is also the metric that enables a company’s management team to review and select the best possible options for the generation of shareholder value in light of the firm’s cost of capital. Therefore, when engaged in the process of security selection, it is necessary for investors to look not only at the quantity and quality of the company’s Free Cash Flow, but also the manner this free cash Flow is deployed by management.
From the perspective of a company’s management team, there are only 5 possible uses of Free Cash Flow:
1. Cash dividends
2. Stock repurchases
3. Debt reduction
4. Acquisitions
5. Reinvestment in company capital projects.
Every conceivable option for the allocation of a dollar of Free Cash Flow use falls into one of these 5 applications. Often management will employ some of each, but we see a distinction between the first 3 uses and the latter 2. We believe that unless the return on incremental capital is superior to the firm’s cost of capital, (Bank’s Interest Rate), there is little point in pursuing option 4 (making acquisitions) or option 5 (reinvesting in the business beyond maintenance capital expenditures.)
So, when and if acquisitions and reinvestments fail to generate sufficient returns, free Cash Flow should be returned to shareholders via one of the first 3 options.
These first 3 possible uses of Free Cash Flow (cash dividends, stock repurchases and debt reduction) are all effectively dividends payable to shareholders. Therefore, we refer to these 3 options collectively as Shareholder Yield.
Question:
All the above and much, much more we can get from reading. So what?
Have i try to put into practice? i have not. Even if i want to put into practice, How to go about it? Read AR as much as possible?
Anyone has a procedure or a good practice to ensure FCF is real?
WB:-
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.
Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.
NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
