The purpose of this book is to explain Free Cash Flow and how to use it to increase investor return. The author explains the differences between Free Cash Flow and GAAP earnings and lays out the disadvantages of GAAP EPS as well as the advantages of Free Cash Flow. After taking the reader step-by-step through the author's Free Cash Flow statement, the book illustrates with formulas how each of the four deployments of Free Cash Flow can enhance or diminish shareholder return. The book applies the conceptual building blocks of Free Cash Flow and investor return to an actual company: McDonald's. The reader is taken line-by-line through the author's investor return spreadsheet model: (1) three years of McDonald's historical financial statements are modeled; (2) a one-year projection of McDonald's Free Cash Flow and investor return is modeled. Five other restaurant companies are compared to McDonald's and each other using both Free Cash Flow and GAAP metrics.

GEORGE C. CHRISTY, CFA, has more than thirty years' experience in the financial markets. He has served as corporate banker for Fortune 500 and middle market companies, as well as treasurer of a publicly owned telecommunications equipment manufacturer. Christy has a BA from Princeton University and an MBA from the University of Chicago, and holds the Chartered Financial Analyst (CFA) designation. He is a member of the Los Angeles Chapter of Financial Executives International, the CFA Institute, the CFA Society of Los Angeles, the Japan America Society, and the International House of Japan.

Klappentext

For years, GAAP earnings per share was the financial metric of choice for virtually all professional equity investors. However, increasing problems with this approach, combined with a growing appreciation of investment economics, have caused many investors to turn to Free Cash Flow as their primary financial metric.

Even with the growing popularity of Free Cash Flow, the lack of detailed information in this field has made it difficult for many investors to integrate Free Cash Flow into their daily investment discipline. That's why George Christy—a financial executive and corporate banker with over thirty years of experience—has created Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks.

Filled with in-depth insights and practical advice, this reliable resource shows you how analyzing a company's financial performance can put you in a better position to pick winning stocks and improve the overall returns of your portfolio. Throughout the book, Christy explains the differences between Free Cash Flow and GAAP earnings, and describes the advantages of Free Cash Flow. He also takes you step by step through the Free Cash Flow Statement^®—which focuses on the primary drivers of investor return: revenues, cash operating margin, and use of capital—and illustrates how each of the four deployments of Free Cash Flow can enhance or diminish shareholder return.

In order to put the ideas outlined in perspective, Christy applies the conceptual building blocks of Free Cash Flow and investor return to an actual company—McDonald's—and goes line by line through the downloadable Free Cash Flow Worksheet^® that integrates the primary components of share value into an investor return model. Five other restaurant companies are compared to McDonald's, and each other, using both Free Cash Flow and GAAP metrics.

Rounding out this detailed discussion of Free Cash Flow, Christy shows you how to assess a CEO's commitment to investor return by analyzing three key sources, and explains how to use the Free Cash Flow Worksheet in your stock search, from finding candidates with screeners to making buy, hold, or sell decisions.

Cash is the essence of shareholder value, and with Free Cash Flow as your guide, you'll quickly learn how to use this important metric to find, and profit from, great stocks.

The Free Cash Flow Statement^® and the Free Cash Flow Worksheet^® used in this book and found on its companion Web site (www.wiley.com/go/christy) were specifically developed by the author for this book. Be sure to see the detailed Table of Contents on page IX. Free Cash Flow goes where no other investment book has gone before.

Inhalt

Foreword xv

Preface xix

CHAPTER 1 Investing 101 1

Price 1

Free Cash Flow 2

Risk and Return 3

The Return Multiple 4

Return and Price 4

Debt 6

Equity 9

Debt versus Equity 11

Private Company versus Public Company 12

CHAPTER 2 The Accounting Fog Machine 15

GAAP: Competing Theories, Matters of Opinion,Political Compromises 16

GAAP: Accrual Abuse 17

GAAP: Errors Bred by Complexity 17

GAAP'S Gap 18

GAAP EPS: An Incomplete Definition of Financial Performance 18

GAAP EPS: Investing in an Economic Vacuum 18

EBITDA is Not a Cash Flow Metric 19

The GAAP Cash Flow Statement 19

Beware the Balance Sheet 20

Liquidity 21

Fixed Assets and Depreciation 21

Leverage and Debt Service 22

Whose Return on Equity? 22

The Notes 23

When Do Accruals Meet Cash Flows? 23

What is to be Done? 24

CHAPTER 3 Free Cash Flow 25

Reconciliation of Net Income and Free Cash Flow 25

Free Cash Flow versus Net Income 27

A Universal Definition? 28

Academic Research and the Discounted Cash Flow Model 29

Barron's Rankings 30

Buy-Side Users 31

Private Equity Firms 31

Warren Who? 31

A Vast Media Conspiracy? 32

FASB Staff Findings 32

FAS 95: A Cruel Rule 33

EPS Misses: The Real Deal 33

An Alternative to the Government Number 34

CHAPTER 4 The Free Cash Flow Statement 35

Building the Free Cash Flow Statement 35

Four Key Questions 40

Revenues 41

Operating Cash Flow 43

Working Capital 44

Capex 45

Capex: Magnitude and Risk 46

Capex and Capital 47

Capex Transfer 48

Capex Visibility 48

Capex and Investor Return 49

Free Cash Flow 49

Free Cash Flow Yield 50

CHAPTER 5 Free Cash Flow Deployment 53

Acquisitions 54

Buybacks 56

Dividends 59

Debt 60

Projecting Investor Return 61

CHAPTER 6 The Free Cash Flow Worksheet 65

Worksheet Features 66

Entering Historical Data 68

Adjustments to GAAP Cash Flow 68

Operating Cash Flow 71

Capex 71

From the Balance Sheet 72

The Free Cash Flow Statement 73

GAAP Data 74

Percentages 75

Per Share Data 76

Incremental Data and Company's Reinvestment Return 77

Cash Sources and Deployments 78

Acquisitions 80

Buybacks 80

Dividends 81

Debt 82

Operations 82

Projecting Free Cash Flow 83

Projecting Cash Sources 86

Projecting Acquisitions 87

Projecting in Share Value Due to in the Number of Shares 88

Projecting Investor Return from Dividends 90

Projecting in Share Value Due To in Debt 91

Projecting in Share Value from Operations 94

GAAP Data, Percentages, and Per Share Data 94

Incremental Data and Company's Reinvestment Return 95

Investor Return Projection 96

Return Multiple 98

Adding Periods to the Worksheet 100

Using the Worksheet 100

CHAPTER 7 Six Companies 101

Revenues 102

Percentage Change in Revenues 102

Operating Cash Flow Margin 103

Capex as a Percentage of Revenues 105

Free Cash Flow Margin 106

Free Cash Flow Per Share 107

The Governme…