On Mar 6, 7:45*am, Tuxster <cdanajack...[at]yahoo.com> wrote:
- quote -

I agree with kastnna that your first formula (above) is best. I do try
to analyze companies, and to me it seems obvious that the purpose of
depreciation expense is to recognize that producing assets must
eventually be replaced. Thus at some point, cash is going to exit the
cash account and show up as PP&E (property, plant, & equipment). To
get more accurate, one would have to know what estimated replacement
costs are, to achieve the same level of unit production, and whether
the last few years of cap ex are representative of the next few years,
or if a major cap addition is forecast by the company, expected cost
recovery, etc.. This would vary from industry to industry, but may be
consistent within an industry, so intra-industry company comparison
might be useful.

Another statement to look at is sources and uses of funds. I don't see
how your third formula does not double-count, since changes in working
capital could show up in any number of balance sheet accounts,
including cap ex, wouldn't it?

Caveat! I'm merely an end-user of accounting! A major problem I've run
into is trying to dope out what went on in a merger or acquisition,
since the details of the acquired company's revenue, net profit, and
so on are not always disclosed. And I never know what to think about
the usual and sometimes vast additions to Goodwill. Many seasoned
accountants have had a lot of trouble figuring out what went on with
stock options ;-(

I may Google around for an accounting site :-)


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On Mar 6, 6:45*am, Tuxster <cdanajack...[at]yahoo.com> wrote:
- quote -

If your asking for the purposes of stock price valuation, your first
formula is probably best. Both of the others involve "net income"
which can be easily fudged to make a company look better than it truly
is.

Quick disclaimer: I don't invest in individual stocks and therefore
analysis of them is not my forte. My above statement was something I
picked up during the healthsouth, tyco, enron et al scandals.

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Hi,

Which is the "best" formula to use for calculating free cash flow?

I've read about several.

Free cash flow=(operating cash flow)-capital expenditures

OR

Free cash flow=(net income+depreciation)-capital expenditures

OR

Free cash flow=((net income+depreciation)-changes in working capital)-
capital expenditures

That's THREE different formulas!

Which of these should I use when I run my discounted cash flow models?

I want the one that will give me the truest calculation of a
company's free cash flow.

Thanks for the help!


-Dana


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