Hi Team Mergers & Inquisitions / Breaking Into Wall Street, I am Arpit Dewan from INDIA thank you so much for your Videos and most importantly sharing the Spread sheets. What I am not been able to learn from IB Institutes, had learned from you folks. With Honour I am subscibing your channels and will recommend it to all the needy analysts as well.
This is such a great video. I love the usage of the case presentation to illustrate the CFO, FCF and value drivers. I hope you can do another one in more detail tying in how each value driver would affect the final conclusions drawn.
Thanks for the suggestion, but probably not, because it's very boring to watch non-Excel explanations in video format, and that topic is easier to address and explain in writing. Please see some of the stock pitches or industry-related articles on M&I for examples.
I was looking at a company's 10Q and was trying to figure many things out. FCF Conversion was the most mysterious to me till I saw this video. Any suggestions on how to read a 10Q/10K for a newbie? Very basic.
To really understand a 10-Q or 10-K, you need to use it to create a model. Just "reading it" won't do much - it's like trying to understand math by reading a book rather than solving math problems. So... we recommend practicing, asking others for feedback, and reviewing existing models to see how they used the statements to create the model.
No, not necessarily. It depends on the company, industry, and growth/maturity stage. Some people will make this simplifying assumption but it's not always true due to factors like inflation and changes in the company's capital spending over time.
Thanks for this great video. However, I noticed that we compare an after-tax figure (Free Cash Flow) with a before-tax figure (EBITDA). Shouldn't we take the tax out of EBITDA? How does this work?
No, that's the whole point: you're trying to assess how much of the company's EBITDA actually "flows through" into Free Cash Flow, after items like Taxes, the Change in Working Capital, etc. Companies with lower tax rates should be viewed more favorably because they can convert EBITDA into FCF more efficiently.
Thanks a lot for the video. Quick Question - in the last part of the video, we see that the DEBT/EBITDA is very low (0.6) and it's becomes lower as the yaers progress (=0.2) so in the beginging there is no problem with this figures, right? In a way that we do'nt even need to check the conversion rate. we need to be aware of it only when the DEBT/EBITDA is high and then the FCF conversion rate can compensate on that, right?
You're conflating concepts that are not necessarily relate. The point of FCF conversion is to measure a company's overall cash flow and possibly its ability to service Debt in the future. The fact that Debt / EBITDA is low means that we don't care much about Debt servicing, but we do still care about how efficiently the company generates cash flow.
Hi Brian - since we are reducing interest from EBITDA ( in reconciliation), this essentially becomes FCFE right ? i got confused when you said FCF, does it mean FCFF or FCFE. Since you are reducing interest, then ideally looks like FCFE, but then what about the principal payments. Wont we include those as well in reconciliation ? Please help
Neither one. There are three types of cash flow: FCF, FCFF, and FCFF. FCF is closer to FCFE because it includes net interest. The main difference is that with FCFE, people also often include principal repayments. My #1 tip is not to obsess too much about exactly what goes into every single metric (#1 mistake that failed Ivy League applicants make) but instead to focus on the big picture, i.e. which company generates cash flow more efficiently from its core business.
![What is Free Cash Flow? [REVISED] Meaning, Calculations, Variations, and IFRS Differences](http://i.ytimg.com/vi/A1lS4KnANBw/mqdefault.jpg)
![What is Free Cash Flow? [REVISED] Meaning, Calculations, Variations, and IFRS Differences](/img/tr.png)
![Eminem - Like My Shit [Official Audio]](http://i.ytimg.com/vi/vx_IMvFkrfA/mqdefault.jpg)
![Working Capital and the Change in Working Capital in Valuation and Financial Modeling [REVISED]](/img/1.gif)
Hi Team Mergers & Inquisitions / Breaking Into Wall Street, I am Arpit Dewan from INDIA thank you so much for your Videos and most importantly sharing the Spread sheets.
What I am not been able to learn from IB Institutes, had learned from you folks.
With Honour I am subscibing your channels and will recommend it to all the needy analysts as well.
Thanks for watching!
This is such a great video. I love the usage of the case presentation to illustrate the CFO, FCF and value drivers. I hope you can do another one in more detail tying in how each value driver would affect the final conclusions drawn.
Thanks! We hope to cover those soon.
13:45 positive FCF if sustainable
Can you do a series on industry analysis basics in equity research? Something that goes beyond the porter's 5.
Thanks for the suggestion, but probably not, because it's very boring to watch non-Excel explanations in video format, and that topic is easier to address and explain in writing. Please see some of the stock pitches or industry-related articles on M&I for examples.
I was looking at a company's 10Q and was trying to figure many things out. FCF Conversion was the most mysterious to me till I saw this video. Any suggestions on how to read a 10Q/10K for a newbie? Very basic.
To really understand a 10-Q or 10-K, you need to use it to create a model. Just "reading it" won't do much - it's like trying to understand math by reading a book rather than solving math problems. So... we recommend practicing, asking others for feedback, and reviewing existing models to see how they used the statements to create the model.
Is depreciation roughly equivalent to maintenance capex?
No, not necessarily. It depends on the company, industry, and growth/maturity stage. Some people will make this simplifying assumption but it's not always true due to factors like inflation and changes in the company's capital spending over time.
At 6:22 in video, how did you arrive at the Net Interest Expense numbers? Those numbers aren't in the Income Statement.
We used the numbers from Capital IQ for Foot Locker (and the company does disclose Interest Income and Expense somewhere in its filings).
Thanks for this great video. However, I noticed that we compare an after-tax figure (Free Cash Flow) with a before-tax figure (EBITDA). Shouldn't we take the tax out of EBITDA? How does this work?
No, that's the whole point: you're trying to assess how much of the company's EBITDA actually "flows through" into Free Cash Flow, after items like Taxes, the Change in Working Capital, etc. Companies with lower tax rates should be viewed more favorably because they can convert EBITDA into FCF more efficiently.
@@financialmodeling Okay, got it now. Thanks for the response! You're doing a great job!
Thanks a lot for the video. Quick Question - in the last part of the video, we see that the DEBT/EBITDA is very low (0.6) and it's becomes lower as the yaers progress (=0.2) so in the beginging there is no problem with this figures, right? In a way that we do'nt even need to check the conversion rate. we need to be aware of it only when the DEBT/EBITDA is high and then the FCF conversion rate can compensate on that, right?
You're conflating concepts that are not necessarily relate. The point of FCF conversion is to measure a company's overall cash flow and possibly its ability to service Debt in the future. The fact that Debt / EBITDA is low means that we don't care much about Debt servicing, but we do still care about how efficiently the company generates cash flow.
Is there any way we can get the excel spreadsheet that you use in your videos?
+john harrison Click "Show More" under "Published on Oct 27, 2015". Scroll to the bottom. Click the files.
Hi Brian - since we are reducing interest from EBITDA ( in reconciliation), this essentially becomes FCFE right ? i got confused when you said FCF, does it mean FCFF or FCFE. Since you are reducing interest, then ideally looks like FCFE, but then what about the principal payments. Wont we include those as well in reconciliation ? Please help
Neither one. There are three types of cash flow: FCF, FCFF, and FCFF. FCF is closer to FCFE because it includes net interest. The main difference is that with FCFE, people also often include principal repayments. My #1 tip is not to obsess too much about exactly what goes into every single metric (#1 mistake that failed Ivy League applicants make) but instead to focus on the big picture, i.e. which company generates cash flow more efficiently from its core business.
Mergers & Inquisitions / Breaking Into Wall Street Got it. Interesting. Thanks again