A question about DCF valuation method and FCF calculation

Hi all!!

I’m trying to valuate a company with a Discounted Cash Flow (DCF) method, and I try to do it using the available information in the P123 panels.

But the FCF do not appear in a single box or line or anywhere, or maybe I’m not able to find it.

Then I look for the definition of FCF, and I discover that there are more than one FCF’s definition. Uh oh…

For instance Investopedia says:

FCF = Operating Cash Flow – Capex

And P123 says:

FCF=Cash from opera- Capital Expeditures – Total divident paid

And then there is the Unlevered Free Cash Flow:

UFCF=EBITDA-CAPEX-Working Capital- Taxes

Then I look at the Statment of Cash Flows, but I’m not sure about how to calculate the FCF.

And my questions, if anybody is so kind to help me:

Capital spending is Capex???

If not, how can I calculate Capex?

Which is the most appropriate FCF for a DCF valuation?

Can I calculate the FCF with the Statment of Cash Flows alone? Or do I need the Income Statment and the balance sheet?

Thanks!!!

DCF is covered in this portion of the on-line strategy design course:

https://drive.google.com/viewerng/viewer?url=https://www.dropbox.com/sh/frm5v2a56r4kt3e/AADsig9lZlaKciVOBNmJc0jQa/StrategyDesign/Topic3E.pdf?raw%3D1

That PDF will explain the reasons why traditional DCF, despite its theoretical importance, is a horrible way to work in the real world. It will offer, as an alternative, a much more do-able adaptation, the Residual Income Model (based on coursework from Stanford’s Charles Lee) and show in detail how to do it in Excel and/or on P123

Besides reading Marc’s PDF, which is very valuable, you can also read my extensive write-up about DCF here: https://blog.portfolio123.com/2019/10/21/how-to-be-a-great-investor-part-two-understand-value/

To answer your specific questions, the CFA’s formulas, expressed in P123 TTM language, are, for free cash flow: OperCashFlTTM - CapExTTM; for unlevered free cash flow: OperCashFlTTM - CapExTTM + IntExpTTM*(1-TaxRate%TTMInd/100). DCF valuation is normally done for the enterprise value of a firm, and therefore unlevered free cash flow should be used.

I should warn you that it took me about four weeks to automate an intrinsic-value calculation based on DCF analysis using Portfolio123, and I’ve barely used it since because I can get better results by doing much simpler things. But it was a worthwhile exercise because it taught me a great deal.

DCF works in the case where companies have predictable future cash flows, such as those with wide economic moats. The MOAT ETF is a clear demonstration of DCF “working”. MOAT outperformed the SPY last year, no mean feat.

SteveA


Marc,

Thanks a lot for your help, just two things:

-That link do not work, so I can’t acces to the paper. I search for them, in 48 papers Charless Lee wrote: (https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=377), and that’s not there.

-After investigating this method (RIM) it seems like it is for valuing a company that does not pay dividends, and the company I want to valuate pay dividends. It’s a small growth companie that pays dividends.

WOW … I do not know even where to start … :smiley:

My intention was to calculate it manual, but using the information available here … It should be very nice if P123 offers valuation methods as a feature.

None of us (Marc, Paul, Marco, Riccardo, and myself) feels that DCF analysis is a better way to get a sense of the intrinsic value of a company than the tools we already offer. The Core: Value ranking system, which Marc, Riccardo, and I designed, is, in all of our opinions, a superior method to look at a company’s value than DCF analysis. I know that just spits out a number between 0 and 100 rather than a dollar figure, but so be it.

If the company you’re looking up is a non-financial company, here’s a VERY rough guess as to its intrinsic value based on the ranking in Core: Value. (EV stands for enterprise value.)

95 to 100: 2.5 * EV
90 to 95: 2.1 * EV
85 to 90: 1.75 * EV
70 to 85: 1.6 * EV
55 to 70: 1.3 * EV
50 to 55: EV
20 to 50: between 0 and EV
below 20: close to 0 or negative

(Companies can have a negative intrinsic value. If the company is terribly debt-laden or it would cost you more to run the company than what you pay for it, its value is negative. See my above-referenced P123 blog post.)

Yuval,

Yes, of course, I know that the tools you already offer here are far better than DCF analysis, I don’t try to say otherwise.

I have to analyze a company, just one, and I thought I could use the information from P123.

And the DCF it’s useful in that case because it gives a number (a price) which help me to know if the current price of that company it’s fair or not. On the contrary, a position in a ranking system, do not give me that information about one single stock.

Anyway, to have a little more information in the stock section cannot harm anybody, IMHO.

Not sure why it isn’t there. But you can find it at: Learn >> Library and Courses >> Portfolio123 Strategy Design Course >> Topic 3E: Special Topics in Valuation

Valuation poses many traps for those who don’t buy into the critical saying “I’d rather be vaguely right than precisely wrong.” Worry about the potential to generate shareholder wealth. Whether the company retains cash flow or pays a lot is a detail one needn’t worry about considering the vagueness inherent in all varieties of DCF (With RIM, as explained in this source, being a bit less vague than other approaches)

BTW, if you want to work on individual company valuation and do it manually, tht’s fine. The spreadsheet template should be a big help to you. Use it as is. Modify it if you come up woth your own variation. Consider the p123 part of the content just to show you where to find the data items.

Why toss out a rough guess? Flor anyone interested in this sort of thing, one ought to be able to set up an empirical study to see if anything long these lines can be said to make sense.

I’m going to take a look, thank you very much Marc.

is there a way we can get the holdings of MOAT over time?

Wouldn’t you want to subtract dividends and aquisitions as well?

OperCashFlTTM - CapExTTM + IntExpTTM*(1-TaxRate%TTMInd/100) - DivPaidTTM - AcquisTTM

Well there’s FCF to Firm (FCFF) and FCF to Equity (FCFE). I think FCFF is considered “unlevered FCF” and FCFE is “levered FCF”. The difference is in the handling of interest payments and debt. Also FCFF is cash flow available to all capital providers (equity and debt) while FCFE is cash flow available to equity providers only. With that in mind, I would use FCFF against EV.

For FCFF, I’ve been using;

FCFF = OpInc – Taxes – CapEx // may also subtract increase in ΔWorking Capital

For FCFE;

FCFE = FCFF - Interest + Net Borrowing

In practice, I disregard ‘Net Borrowing’ term since it doesn’t jibe with my idea of the important kind of cash flow i.e. from operating activity. Please consider that my idiosyncratic view.

I think DivPaid would come into play if you’re working back from net income. Here’s we’re working from the top down.

Of course, p123’s definition of FCF is slightly different.

I’m standing by for Yuval’s corrections! :slight_smile:

Walter

There are about 20 or 30 different ways to calculate free cash flow, Walter, so I’ll do it my way and let you do it your way. I actually do it two or three different ways myself.

One of the problems is historical. When Joel Stern came up with the idea of free cash flow in the 1960s, there were no cash flow statements–those came into use in the 1980s. So he calculated it from the balance sheet and income statement, as you do (with the exception of CapEx). Most people now primarily use the cash flow statement, but not everybody does.

Just write the name of each method on a piece of paper. Toss them all into a hat. Close your eyes. Pick one. Use that method. And devote the rest of your time and energy to coping with such burdens as the need to forecast more than a quarter out (we see from the earnings estimate revision/surprise cottage industry that even this is hard) and the terminal discount (and don’t get too depressed when you see how sensitive your final valuations are to trivial changes in assumptions).

Or, do what pros do. Post any bullsh** DCF model you want for shosw and then do a relative Valuation to reach a real decision.

Seriously, life is too short to debate how to define cash flows for DCF purposes. Smell the roses. Read a good book. Enjoy some wine. Watch The Bachelor or my new favorite, 90 Day Fiancee. Insult a celebrity on Twitter, Have fun and be happy.

Whisky and some good documentaries or some new reads for me. Got a copy of What’s Behind the Numbers a couple days ago. May crack open tonight. I enjoy continuous learning though…

Is there a list of whatever gems are hidden away on this google drive?
Or better yet, is it browsable?

The entire course is here: https://www.portfolio123.com/doc/side_help_item.jsp?id=200