Summary of Free Cash Flow: Back to Basics

00:00:00 - 00:35:00

This video discusses the basics of free cash flow and how it can be used to valuation a company. The presenter uses Tesla as an example, noting that free cash flow Equity may be negative at young companies, but eventually turns positive as the company grows. As a mature company, free cash flow Equity growth slows down and becomes more in line with net income.

• 00:00:00 In this video, the author explains what free cash flow is and how it is measured. He also points out that there are two different measures of free cash flow: free cash flow to equity investors and free cash flow to the firm. He goes on to explain why these measures are important.
• 00:05:00 Microsoft's free cash flow was 36 397 million in 2021, which was before they repaid 5.5 billion in debt. This demonstrates the importance of accounting for debt repayments when computing a company's free cash flow.
• 00:10:00 The video discusses the basics of free cash flow, explaining that it can be used to explain what happened in a past year, to value a business, and to price a company. It also points out that free cash flow equity is important in computing a pricing multiple.
• 00:15:00 The video discusses how free cash flow is important for companies and how it is used in valuation. It also discusses how free cash flow is used to finance debt and dividends and buybacks.
• 00:20:00 This video explains how to value a firm's equity using free cash flow. The first step is to identify the cash flows that are attributable to the firm's operating assets (e.g., income, capital expenditures, etc.), and then to discount those cash flows at the cost of equity. The equity value is then computed by adding back the value of stock-based compensation (if any) and subtracting out any cash paid in taxes.
• 00:25:00 This video discusses the basics of free cash flow and how it can be used to valuation a company. The presenter uses Tesla as an example, noting that free cash flow Equity may be negative at young companies, but eventually turns positive as the company grows. As a mature company, free cash flow Equity growth slows down and becomes more in line with net income.
• 00:30:00 The video discusses the concept of free cash flow and equity, and how it changes as a company ages. It explains that young companies are more likely to lose money than older companies, and that as companies age their earnings and free cash flow to equity go from negative to positive. It also points out that if your investment is focused on big positive cash flows, you will end up with older more mature companies in your portfolio.
• 00:35:00 The presenter discusses the price to free cash flow equity ratio, which is a statistic that can help investors determine the relative value of a company. The presenter also discusses the price to free cash flow ratio and the effect it has on pricing. The presenter also discusses the price to free cash flow equity ratio and the effect it has on the accuracy of multiples.