expected free cash flow growth

Investing Education Intermediate/Advanced Investment
1

recently reading some of john rotanti’s tweets on fcf, is there a formula for getting to an expected free cash flow growth or do you just take an average of the past few years?

2

I’ve been analyzing cash flows for publicly traded companies for many years and I can tell you how I do it.

There is no standard definition of ‘Free Cash Flow’ and so it can vary. Investopedia defines FCF as

FCF represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets

Well, that’s one way. But what exactly is ‘support operations’ and ‘maintain capital assets’?

I consider 4 levels of cash spending on capital assets (CapEx):

  1. Sustaining CapEx. This is how much of the Cash Flow For Investments (CFFI as shown on the statement of cash flows) is the bare minimum requirement to stay in business. This was important during the Covid-19 pandemic to many companies.

  2. Maintenance CapEx. This seems to align with Investopedia’s definition…maintaining operations

  3. Growth CapEx: Investments to expand operations, improve product lines, enter new markets, etc

  4. Expansion CapEx: Usually involves acquisitions or buy-outs. Example: T buying TWC

But to my knowledge, GAAP does not provide guidance on how CFFI should be broken down to show these levels of capital spending.

To make this more complicated, Mulford and Comiskey in their book ‘Creative Cash flow Reporting’, devotes chapter 10 to ‘Understanding Free Cash Flow’. As it turns out, there are multiple methods company’s use to determine and report FCF.

For me, the easiest way to arrive at FCF is to first adjust the Cash Flow From Operations (CFFO) for any distributions to non-controlling interests and any preferred stock dividends. Then adjust for changes in working capital accounts (cash changes in current assets + Liabilites) and from this ‘core’ CFFO, subtract CFFI. Some reporting sources like TIKR will report the changes in working capital accounts, making it much easier. Here’s an example using 2021 XOM 10K data ($MM)


Reported CFFO:..............................$ 48,129
Dist to non-controlling interests:..........$    224
Preferred Dividends.........................$      0
Net CFFO....................................$ 47,905

Changes in Working Capital Accounts.........$  4,162

'Core' CFFO.................................$ 43,743

CFFI........................................$ 10,235

Free Operational Cash Flow..................$ 33,508

Hope that helps

BruceM