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Learning to Invest / Valuation Strategies
|Subject: Re: Discounted Cash Flow Model - Negative FCF||Date: 2/8/2011 3:24 PM|
|Author: jackcrow||Number: 1635 of 1675|
Any time I'm trying to get a real solid handle on a line item on one of the three sheets I tend to do the following.
1)Pull or input the quarterly data of that line item for at least one business cycle. Currently I would probably reach back to 2005 - 2006.
2)I leave the above data in place as one set, I then create a rolling trailing twelve set. (trailing qtrs 4,3,2,1 then 3,2,1,4 and so on)
I can then scan by eyeball or build a chart that lets me see the two sets of data. What I want to know is what "normal" is, what are the seasonal patterns. Were their any outliers and if so what was the cause?
To get inside the "head" of an industry you may have to do this exercise for several competitors. Honestly, for many mature industries there often is not a lot of use out of this exercise because their numbers vary about as much as glacier does through the season. The kick in the head is the only way to find out who is who is to jump in and start rooting around.
I dodge the CapEx issue as a direct adjustable/forecastable input because I'm lazier than Joe is. If it looks good/normal I grind it through an easy FCFF cruncher and live with the output. To put it another way I don't start with the revenue line. But I'm a mark with chalk cut with an axe guy. A better handle of a the money machine can be built, if you understand the moving parts, by doing it the long way.
In the case of a young company it may be wise to take a good look at the PPE line on the balance sheet and how the industry tends to depreciate assets. CapEx, depreciation and PPE are all related. Getting CapEx right while getting depreciation wrong is going mess with your FCF outputs.
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