Free Cash Flow: Back to Basics

Рет қаралды 122,055

Күн бұрын

In every market correction, investors discover old truths, and this one has been no different. Not only have you seen the conversation shift from scaling up to profitability, but from earnings to cash flows. Managers and investors are suddenly discovering the importance of free cash flow, but as I argue in this session, the definitions of free cash flow range from the self-serving to the delusional. I look at the mechanics of computing free cash flows, to equity and to the firm, and why you may come up with different values depending on whether you are using FCFE to explain what happened in a period, as the base for forecasting future cash flows in intrinsic valuation or as a scalar in pricing. I push back against the notion that positive free cash flows are, by themselves, indicators of company health and note how cash flows evolve as companies age. While free cash flows remain the go-to measure in intrinsic valuation, I don't think that they are good pricing metrics, in most sectors.
Slides: www.stern.nyu.edu/~adamodar/p...
Microsoft Annual Report for 2021: www.microsoft.com/investor/re...

Пікірлер: 136

@ZorakWars Жыл бұрын

It's hard to believe that knowledge like this is free to consume. Thank you for all the videos you share.

@grahamhilldrup1256 8 ай бұрын

I agree. Thank you very much Aswath.

@matias3384 3 ай бұрын

Is not free, you are paying it with adds or subscription.

@midasinvesting Жыл бұрын

A masterpiece of fundamentals

@josipseremet Жыл бұрын

My investing mentor was a student of yours at NYU. I am amazed at his knowledge and breadth of wisdom. As in awe I am of him, he is in awe of you and your wisdom and knowledge you passed on to him. I see and getting the same sense of awe. Thank you again for sharing your knowledge, experience and wisdom.

@rpaalevato Жыл бұрын

Now I see what everybody says you are the best teacher. I was researching about this topic for a week and couldn't get a clear answer. My guess is a lot of folks who says they understand finance don't know why they are doing what they are doing and just repeat some formula they learned from somebody. Thank you

@MrSupernova111 Жыл бұрын

I've spent years researching this topic as it relates to valuing stocks. Nothing about it is easy or straightforward. Much of the analysis is up to interpretation. Anyone who plugs in numbers into a model and simply regurgitates the result has no clue what he's talking about. Damodaran as always impressed me with his insights since my college days many years ago.

@arcarsan Жыл бұрын

Long live Mr. Damodaran, the teacher I would have loved to have during my college years, thank you KZfaq 🙌🏻

@alecouto Жыл бұрын

Thank you professor, always great to revisit the basics.

@Motivation2Invest Жыл бұрын

Exceptional Masterclass, a filter for the noise of the stock market. I am convinced many people talk about "cash flows" but don't fully understand the definition.

@mohamedmadkour6926 Жыл бұрын

Many thanks professor, a masterpiece as usual. Thanks a lot for sharing your very valuable knowledge.

@impushprajyadav Жыл бұрын

Love his lectures Thanks for doing all this for free 🙏

@alexanderm8598 Жыл бұрын

Thank you for amazing session :) such a masterpiece. I love the stats about the company where we can see that the theory is valid :)

@user-tg6zt4yx2b Жыл бұрын

Thank you for showing the financial papers that you are working from. It helps learners like me.

@ramjiYahoo Жыл бұрын

Doing Microsoft's Free Cash Flow to Firm, Free Cash Flow to Equity holders in - Microsoft's Excel- Great learning session Prof sir as always

@loremipsum3625 Жыл бұрын

Thank you very much for sharing your knowledge, Professor Damodaran. 🙏

@chandrannatarajan6616 Жыл бұрын

Thank you professor 🙏. Stay blessed always 🙏

@nebojsascepanovic7277 Жыл бұрын

Dear professor, using your methods and lectures you so generously share with us, I find Meta and Alibaba hugely undervalued. I am aware of all risks and situation in China, but I simply cannot imagine future cash flows that could be so low to justify this market price, especially for Alibaba.

@coachgius Жыл бұрын

Likely BABA undervalued also using the earnings power value neglecting growth. Seems actually close to book value at the moment.

@nebojsascepanovic7277 Жыл бұрын

@@coachgius exactly!👍

@nycolascardoso-ncx Жыл бұрын

Masterpiece. Thank you from Brazil!

@motothedog1710 Жыл бұрын

Thank you! Very helpful! I am saving this to my favorites!

@maljones3802 Жыл бұрын

I am forever indebted to you for this level of transparency of wealth of knowledge

@dhavalrohilla696 Жыл бұрын

A well deserved Masterpiece

@ulissesneto7857 Жыл бұрын

Awesome! Thank you so much professor.

@gkbchua73 Жыл бұрын

Thank you Professor Damodaran. It was a very valuable lecture for me.

@ridzuanali1919 Жыл бұрын

Thank you, Prof. Take care. Stay safe. God bless.

@MrSupernova111 Жыл бұрын

Phenomenal refresher! Thank you!

@itodohaugustine6692 Жыл бұрын

Thank you so much Sir for the explanations. I'm confident in FCF things now.

@patrickmeehan6856 Жыл бұрын

Thank you for the informative and honest video. Perhaps a frame of reference for pricing based on cash flows could be the sector/group/category that the sector is in. By comparing a single stock's cash flow with a basket of, say, 10 very similar companies' cash flows, one might get a useful valuation our of the cash flow metric.

@crosselen9766 Жыл бұрын

please don't ever delete this channel, mister!

@richullingfivefivefive1745 10 ай бұрын

Excellent. I would add though that: EBIAT (or NOPAT), calculation neglects the effect of the tax shield provided by interest expenses. That is why it’s important to account for this when estimating the cost of debt part of the WACC.

@raghavbinnani6473 Жыл бұрын

Thank your sir , loved this session.

@minhanhledoan2537 10 күн бұрын

Such a great insight knowledge. Thank you so much !

@piercingshot1175 Жыл бұрын

THANKS PROFESSOR FOR MAKING ME EASY TO BUILD BALANCE SCORECARD FOR STATE-OWNED ENTERPRISE. SUCH A MASTERPIECEEEEEEEEEE

@rizvinnasser1383 Жыл бұрын

Thank you so much sir . I am an aviation personnel , who recently started a career in value investing to run in parallel . All your videos have refined my views and mental models . Especially these basic fundamental videos have been of profound use to me, I have downloaded it and will be moving to my forever vault . If you could share more videos on basics like balance sheets , p/l statements , reading annual reports , it would be a golden ticket to my future endeavours . Thank you so much. Regards. From India ..

@himsincha Жыл бұрын

What a video. Bravo sir!

@ams_designer_18 10 ай бұрын

Pure Gold dust, free knowledge flow

@matheusvazporfirio2903 2 ай бұрын

Thank you professor, a masterclass for sure

@MoneyVestments Жыл бұрын

Wow. What an insight! Thank you sir!

@FRANKWHITE1996 Жыл бұрын

Very informative ❤ thanks for sharing 😊

@Elclassicodelaelbe Жыл бұрын

Thank you professor. Could you please work through an example in the Insurance Industry? Like P&C? AND in some textbooks it shows for NWC = CA - CL, Here we specifically exclude Cash to get Non-Cash WC. Why do you prefer this? Or what would be the differences? Thank you for providind this valuable information for free. This is such a great time being alive. Thank you professor!

@jaap8232 Жыл бұрын

Thanks for this gift!!

@LayTingThoong Жыл бұрын

Slide 13 might need a correction. At the bottom left, should be value of firm (Value of Operating Assets+Cash+Non Operating Assets). I'm refreshing and updating my knowledge on this on Sunday because you are a great teacher. Thank you for taking the time to do this video.

@adedolapookelana8074 Жыл бұрын

This was insightful. Thank you

@shihanwong99 Жыл бұрын

Thank you so much Prof!

@rocking1313 Жыл бұрын

Acquisitions are Capex , thanks Prof. Damodaran!

@vitaliesurugiu7122 Жыл бұрын

Great lesson. Thank you.

@cedricdellafaille1361 Жыл бұрын

Dear lord so much information to take in as a newbie

@omarrd33 Жыл бұрын

A great mind. Thank you 🙏

@_tyler-_- 2 ай бұрын

Fantastic!

@nrpbrown Жыл бұрын

Incredibly useful

@stevendohse Жыл бұрын

39 min with zero fat. excellent

@ravishingravi Жыл бұрын

Thank you sir.

@zeze9062 Жыл бұрын

Thank you

@joaomiguelkojin Жыл бұрын

Thanks professor!

@manubhatt3 Жыл бұрын

Now don't start asking/expecting him to use psychic powers

@set1896 Жыл бұрын

thank you very much for the informative vid

@jeromevolckerpowell5080 Жыл бұрын

You rock dude!!

@jeromevolckerpowell5080 Жыл бұрын

I mean professor.. you rock professor!

@jimd1617 3 күн бұрын

thank you 🤝

@MitchellC03 Жыл бұрын

I noticed that on the MSFT FCFE calculation the Cash Acquisition value is 8,909 on the CF statement, but in the table it was input as 8,099. Based on this change, the FCFE prior to debt should be 41,091.

@marsaetos9610 Жыл бұрын

Thanks professor

@manubhatt3 Жыл бұрын

Now don't start asking/expecting him to use psychic powers

@zepher10101 Жыл бұрын

Professor Damodaran, In order to adjust for "Effect of Foreign Exchange" - Should I treat it like "Net Recognized Gains on Investments and Derivatives"?

@juliangomezhoyos2804 9 ай бұрын

🤯 10/10

@amitpanigrahi4116 Жыл бұрын

Thank you sir

@user-xs5sy5hv8f 8 ай бұрын

Thank you for the video prof . Why to calculate non cash working capital we use also long-term assets and liabilities?

@necromancer7712 Жыл бұрын

can you comment on META valuation professor. their FCF this quarter was less than 100mln since they are savagely spending on Capex. interesting what your valuation is

@kshirodcwa 4 ай бұрын

😊

@maddysydney Жыл бұрын

All great points. I just lost interest to use valuation to make my next investment 😂

@GingerT1324 Жыл бұрын

Are there not taxes involved when you choose to capitalize R&D vs. expense? Expensing R&D should lower taxes whereas capitalizing R&D should increase taxes. I don't think choosing one or the other nets cash flows to zero.

@nedwards211 Жыл бұрын

How the cash acqquisitions are computed in $8099 in the calculation of MS FFCE ? Can someone help ? thanks in advance

@sidcoolguy7 Жыл бұрын

how to apply FCFE formula to Indian listed companies? can you elaborate with some indian company that uses Ind AS accounting standard?

@krissalmon3747 Жыл бұрын

If you capitalise R&D won’t that produce a much higher capex figure than the one MSFT lists in the cash flow statement and thereby produce a lower FCFF? (Sorry for the stupid question, I’m learning!)

@AswathDamodaranonValuation Жыл бұрын

The earnings will increase by an equivalent amount. MSFT is more profitable than accountants claim it to be, reinvests more than accountants picture it as reinvesting and earns a more model, albeit still attractive, return on invested capital than the one you see in the financial statements.

@krissalmon3747 Жыл бұрын

I see- makes sense. (& thanks so much for your swift reply & content!)

@fizzlemynizzle7035 Ай бұрын

Question: The change in non-cash working capital has to be consolidated with signs reversed according to slide p.7. I wonder since it is being taken from the statement of cash flows: Hasn't that switch of signs already been incorporated? In other words, e.g. Microsofts inventories increase to 7,800 from 7,038 the year prior (see balance sheet). This positive increase of +741 is then already reversed to -737 in the statement of cashflows. Therefore I would think the negative effect on Cashflows has been accounted for and it is false to switch it around again. What are your thoughts? Thx 4 your lessons professor !

@fizzlemynizzle7035 Ай бұрын

Okay I think I found my mistake: If you just took the change in non-cash working capital from the statement of cash flows and consolidated it, it is already negative. Hence if you then subtract it from net income, it turns positive which is incorrect. -(-1,086) = +1,086

@AnilKumar-oq5lc Жыл бұрын

Can i assume FCFF is FCFE Prior to debt( $41,901)+ Interest Costs paid during the year?

@scottiebumich Жыл бұрын

Explain to me how @16:00 cash retained (not distributed in dividend) is not retained earnings?

@sakshambhardwaj2215 Жыл бұрын

He's saying that if you are thinking retained earnings then you are going to wrong side of the balance sheet. Retained earnings is not the wrong answer

@prageethwarnak9688 Жыл бұрын

what do you think about buffets' famous owners earning method professor?

@maxh1976 Жыл бұрын

Crazy this is free

@kevinkasimov651 Жыл бұрын

What if a company has excellent free cash flow but perhaps has some problems like a negative working capital or negative tangible book value?

@jmpage2001 Жыл бұрын

Was there a simple copy and paste issue on Cash acquisitions? Should be 8909 instead of 8099

@simtu251 Жыл бұрын

Thanks for the great video, professor! I rewinded a few times but I cannot get to 19,370 Reinvestment that you explain around 11:00 in MSFT cashflow statement . Can somebody write down the formula for me?

@kalpaperera1285 Жыл бұрын

Capex(20.6) + change in non-cash WC(1.08) + cash acquisition(8.09) - non cash gain(-1.2) - Depreciation(11.6). P.S. Non-cash gain that's deducted here is actually a cash re- adjustment(for non operating income in the Income statement that's carried to net income) than a reinvestment,but an essential component that must be included in the calculation of fcff.

@simtu251 Жыл бұрын

@@kalpaperera1285 Thanks a lot!

@kalpaperera1285 Жыл бұрын

@@simtu251as I look at it again, if you're serious about the calculation, above formula is only correct if you begin the fcff calculation with net income [now it gets little complicated, you then need to adjust it for this and interest income and so on]. But here, there's a fractional theorical error in the fcff calculation, when you begin the calculation with operating income [bottom box] that this non-cash, non operating income item shouldn't be included.[Because, in the IS, this non-cash item (that's later been adjusted here) is a line item that sneak up after the operating income, and it's unfair to adjust something that's not initially accounted for]. I hope my judgement is correct here and you'll be able to understand it.✌️

@jonoleta 5 ай бұрын

Hi! Is it possible "Cash acquisitions" on minute 10:50 is incorrect? I think it should be 8909 instead of 8099, leading to a FCFE prior to debt of 41091. Thanks a lot for the lesson.

@fizzlemynizzle7035 Ай бұрын

Keep in mind I am only a layman learning from the professor, but since Microsofts statement clearly says $(8,909) I would assume its a typo on the slides.

@zahirahwan3814 Жыл бұрын

In your next video, can you share about DACF and how EV/DACF is preferable to EV/EBITDA when evaluating oil and gas companies?

@shiro743 Жыл бұрын

Great work sir ❤ .. Are you from southern India.... Or living abroad?

@chrisreiche Жыл бұрын

so my Cashflow from Operations - CapEx = FCF ist not the best way? ;)

@omurcansari Жыл бұрын

🍀

@Commando303X 8 ай бұрын

11:25: Wouldn't the effective tax-rate shown on the income-statement be pertinent to the company's taxable-income rather than to its operating income? That is, if taxable-income is markedly lower than operating-income because of the deduction of interest-expense, then the rate listed on the income-statement might be an exaggeration for the purpose of free-cash-flow-to-firm (F.C.F.F.) computation, no?

@roozbehfazl8617 Жыл бұрын

Thanks a lot for your as always great teaching. Btw, you've entered Microsoft's Aquisitions number incorrectly in your FCFE calculations: 8099 instead of 8909.

@sureshyaso Жыл бұрын

Thank you for pointing this out, I checked multiple times my calculation. Now I see this is the error, that's why it's not matching with the professor.

@richardgordon Жыл бұрын

@@sureshyaso Many Thanks! I came to the same conclusion. A transpose error. Incidentally, do you know how he came up with the $19, 370 reinvestment number?

@sureshyaso Жыл бұрын

@@richardgordon yes here is the break-up of reinvestment numbers: Depreciation & Amort = 11686 +Non-recognised losses (gains) = -1249 -Changes in WC = 1086 -Capex = 20622 -Cash Acquisition = 8099 Net Re-investment = -19370. Hope you got it! all the best

@richardgordon Жыл бұрын

@@sureshyaso Thank you very much! Very much appreciated! Best, Richard Gordon

@Michael_NV Жыл бұрын

Thank you very much for this presentation and slides! I find it very useful. How did you come to Operating income of $ 69,916?

@kalpaperera1285 Жыл бұрын

Look for operating income line item in the Income Statement; after gross and operating expenses are deducted from the revenue you get the operating income.

@coachgius Жыл бұрын

Is unlevered free cash flow another name for free cash flow --> equity?

@stefankrgovic2167 Жыл бұрын

Levered means after debt, i.e. what is leftover to distribute to equity investors. Thus levered is FCFE, and unlevered is FCFF.

@coachgius Жыл бұрын

@@stefankrgovic2167 sorry the opposite then. Essentially means after you account for (subtract) the debt. For a common shareholder is FCFF a better metrics?

@hundredsac Жыл бұрын

I heard Tesla is growing their FCF, but the media says otherwise.

@karansharda2072 Жыл бұрын

Can anyone please explain wc investment

@Martinit0 5 ай бұрын

Building up inventory to be able to timely satisfy future demand. That is a cash outflow because suppliers want to be paid. But you didn't sell yet, so no corresponding inflow. Generally, when a company grows, it has higher wc needs.

@Tonyforeman659 Жыл бұрын

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The pandemic came and taught everyone the importance of having multiple stream of income, unfortunately having a nice paying job doesn't mean you are financial secured anymore. So we all need to put in an extra-income earning chance, like investments.

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@pablosmith1747 Жыл бұрын

Who's Mrs Camille Anne Hector ?!

@piousbox Жыл бұрын

Huh? At 3:38 Free Cash Flow does not include working capital needs? Only debt servicing? And what in the world is "expected value added by future investments"? Aswath probably refers to his own portfolio. That slide cannot possibly represent a real business.

@satvikkhare1844 Жыл бұрын

FCFs are the most important aspect when looking at fundamentals of the company.

@robertschwartz7664 5 ай бұрын

FCFF is not the cash flow the firm generated if it was 100% equity financed. Because you’re ignoring the fact that operating income is inflated by the benefit of leverage.

@joeveebeckham Жыл бұрын

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