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Free Cash Flows Not As Strong As Being Reported


Despite the commonly held belief stocks are selling at preposterously low valuation levels, the same is not true for free cash flows.

When we adjust cash flow from operations to reflect normalized balance sheet activity and working capital items, including the recent spurt in discretionary spending on items such as capex, R&D, SG&A, bonuses, etc, much of this purported free cash in being consumed. For example, Autodesk, which today filed its 10Q, under the most common definition of free cash flow of operating cash flow minus capital spending, showed approx. $132 MM. in free cash flow. Yet, when normalizing working capital, taxes and discretionary items are taken into account, the amount of free cash flow is less than half, at $ 57 MM.

Thus, while we expect press releases to continue to show strong year over year comparisons in net income and even free cash flow, firms, because they do not make the necessary adjustments to cash flow from operating activities, from which free cash flow is based, enterprises will in essence be reporting a misleading number.

The number being reported does not represent cash that could be distributed to shareholders while still allowing for maximum growth.  The CT Capital definition of free cash flow represents the true income for the equity investor resulting from an investment in the enterprise.

For additional information, see “Security Valuation and Risk Analysis.” 

Disclosure: no positions