No. of Recommendations: 3
Dear nanhalia,

For what its worth, Warren Buffett is not a big fan of EBITDA. The problem is that amortization is often truly not a "cash charge"; however depreciation usually eventually is a real expenditure. Take that however you like it... Also taxes are a real expense, I like the idea of an "after-tax" proxy for cash flow.

I like Stewart's methodology of FCF = NOPAT - I (I = "investments"). His methodology also focuses on various sources of "free money" on the balance sheet (he calls "non-interest bearing current liabilities" or NIBCLS); the idea is that for example increases in accounts payable may fund a business (and increase its free cash flow).

My feeling is that though folks use several different sorts of models, to check each other. For example, they may make some FCF predictions, then compare price/FCF or price/earnings to a peer group (is it comparable? If not, why?) But I think that ultimately some sort of DCF must be done.

Lleweilun Smith
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