How to calculate FCF?

[jamesjuhn]

Hey you all, I’m investing in Australian companies and I’m looking through the fundamentals of the company BHP billiton. When we apply Phil’s method, the appropriate standard that the firm’s debt should be can be derived from the following equation (we are seeing whether the debt can be repaid in 3 years):

Long-term debt / Current FCF (free cash flow)

There fore I’m in Australian msn money and I found long term debt, but I can’t be sure how to figure out current free cash flow.

http://money.ninemsn.com.au/shares-and-funds/research-a-company/results.aspx?code=BHP&ctry=AX&inforeq=historical


Can any of you work out the equation of FCF for me using the data from above site(I want the FCF to be in millions, like the long term debt. Also, how you derived the equation would be nice)?

Sorry, I tried to upload it through the image loader, but it is waaay too slow.


Thank you. Your help is greatly appreciated.

[Giovanni28]

Originally Posted by jamesjuhn

Hey you all, I’m investing in Australian companies and I’m looking through the fundamentals of the company BHP billiton. When we apply Phil’s method, the appropriate standard that the firm’s debt should be can be derived from the following equation (we are seeing whether the debt can be repaid in 3 years):

Long-term debt / Current FCF (free cash flow)

There fore I’m in Australian msn money and I found long term debt, but I can’t be sure how to figure out current free cash flow.

http://money.ninemsn.com.au/shares-and-funds/research-a-company/results.aspx?code=BHP&ctry=AX&inforeq=historical


Can any of you work out the equation of FCF for me using the data from above site(I want the FCF to be in millions, like the long term debt. Also, how you derived the equation would be nice)?

Sorry, I tried to upload it through the image loader, but it is waaay too slow.


Thank you. Your help is greatly appreciated.

If you click on the 'Cash Flow' link, it explains how to calculate FCF (see attached imaged).

Using the information on the site:

Cash Flow per share - Capital Spending per share = Free Cash Flow per share

To find FCF in millions, just multipy the FCF per share by the total number of outstanding shares.





.

[jamesjuhn]

Hey Thanks for the reply Giovanni, but I have one question:

The definition of outstanding shares -

The shares of a corporation's stock that have been issued and are in the hands of the public. also called outstanding stock.

Here are another page for definitions:

* Outstanding shares - (Stock market): Definition



Why do we multiply the outstanding shares to the Free Cash Flow per share? Wouldn't that limit it to stock that has only been issued to the shareholders and not include the stock that company has itself or bought back from investors?

[Giovanni28]

Originally Posted by jamesjuhn

Hey Thanks for the reply Giovanni, but I have one question:

The definition of outstanding shares -

The shares of a corporation's stock that have been issued and are in the hands of the public. also called outstanding stock.

Here are another page for definitions:

* Outstanding shares - (Stock market): Definition



Why do we multiply the outstanding shares to the Free Cash Flow per share? Wouldn't that limit it to stock that has only been issued to the shareholders and not include the stock that company has itself or bought back from investors?

The webpage says "Historical financials, Per share statistics", meaning the actual figures reported have been divided by the number of outstanding shares.

Ex: If Cap Ex per share is $100 and there are 10,000 outstanding shares, then the total Cap Ex is $1,000,000.

(Cap Ex per share) x (Outstanding Shares) = Total Cap Ex.


To answer your second question, the purpose of a buyback is to reduce the amount of outstanding shares and hence, increase EPS and stock price. So bear in mind that if you adjust the FCF to include the shares bought back in previous years, you will also need to adjust EPS and possibly even the current price (assuming the P/E stays the same). This becomes an unnecessary mess, besides, shares bought back dont trade on the market so they are not really a factor. Think of them as being 'out of circulation'.


There is the definition of FCF per share: Free Cash Flow Per Share


If what you are trying to calculate is total FCF then that figure is the Cash Flow from operations minus the Capital Expenditures.

Now, because the website reports these figures as 'per (outstanding) share' figures, you have to multiply those figures by the number of outstanding shares (currently reported on the 8th line down) to get the actual amounts.

Also note that those figures are reported in 'cents' so you have to further divide the number by 100 to get the dollar amount.

[jamesjuhn]

Thanks very much Giovanni, I really appreciate your help.

[joshuat]

BTW, somebody provided a link to an online stock analyzer that computes FCF for you. It's stock2own.com: Stock Analyzer

I don't agree with the tool's analysis, and ignore it. It is an easy way to get a look at the companies #s without a subscription to ValueLine or the like.

Oh, click the "Raw data" checkbox at the left to see the FCF.

[jamesjuhn]

Hey joshuat, thanks for the site. By the way could you tell me with which part of the tool's analysis do you not agree with? Could you tell me? Thanks.

[joshuat]

The part where it is an automatic tool. :)
The part where it relies on earnings, rather than FCF.

Just take a few examples. Plug JNJ in there, and see what kind of price it comes up with. $24.94. Somebody should tell Warren Buffett, who is buying at $62.

Plop in a bank, and see it completely ignore how banks work.

But most importantly, 'past performance is no guarantee of future results' is not just legal boilerplate. It's really true.

If you haven't read several 10Ks, and can't describe the functioning of the business as well as the CEO, and draw up a quick balance sheet, you aren't investing, you are speculating, in my opinion.

As you might guess, I am not here because of the Rule #1 stuff, but because of the Graham/Buffett focus.

[joshuat]

For what it's worth, here's a little spreadsheet image that I find pretty handy to quickly analyze/present FCF calculations. This forum apparently doesn't allow attachments of excel files, so here is a screen snapshot. The math is trivial, so you can easily recreate it should you want. The shaded cells are where you input data, the rest is calculated for you.

This is pretty handy when you are calculating value based on xEBITDA, FCF, etc.

"Price" is share price in dollars. Everything else should be put in the same units, which normally is millions. I.e. there are 196.5 million shares outstanding, there are 5,500 million (5.5 billion) in sales, etc.

As a side note, do you find this an attractive investment?