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Free Cash Flow (FCF) and FCF Yield

Monday, June 24th, 2013

Free cash flow (“FCF”) equals NOPAT minus change in Invested Capital.

FCF reflects the amount of cash free for distribution to both debt and equity shareholders.

FCF Yield = free cash flow/enterprise value.

The level of FCF does not always reflect the health of a business or its prospects.

For example, a large amount of FCF can be a sign that a company has limited investment opportunities and, hence, limited growth prospects.

On the other hand, negative FCF can be an attractive indication that a company has more investment opportunities than it can fund with cash from operations.

Zero FCF could mean that the company generates just enough cash to internally fund its growth opportunities.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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