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Subject:  Re: Discounted Cash Flow Model - Negative FCF Date:  2/8/2011  11:03 AM
Author:  jackcrow Number:  1633 of 1675


I doubt anyone can give you a fixed answer for your questions. There is a reason you have options. The game is to try to build a model that you believe best fits the firm being analyzed. All these variables can differ from industry to industry and management team to management team. If you really want to figure this out you need to find some comparable companies and dig through their histories and see what has occurred in the past. Then you need to decide how likely the new kid on the block is going to mirror that/those patterns.

For some start ups operating margin expands over time. Software companies are like this; it takes time to build the marketing infrastructure and sales force, to get their foot in the door they may sell their product as cheap as they can. As they gain market share and the back end build up subsides operating margin expands. If they gain pricing power they gain further margin expansions. A retail firm is a different beast as margins are expected to be tight and growth needs to come from the top line. Service firms are different still and lie somewhere in the middle, and on and on.

Some industries are far more working capital intensive then others. Some firms may need large working cap as percentage of revenue early and be able to ease that percentage down over time others by the nature of their business they are going to have to keep their foot on that gas pedal.

The cap ex question may be the toughest because it really has two components, the nature of the industry and managements strategic planning. Some capex must be spent in order for the business to run how much above that is the management team pumping in to manage growth?

Not a lot of help I know. Baby cash flow negative firms are tough to value using hard core fundamental approaches because so many inputs are educated guesses. This is why most of the realm short cuts to relative valuation methods.

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