My understanding is that FCF = Net Operating Cash Flow - Capital Expenditure.
I had a look at NUF and my first question would be about the capital expenditure in the investing cash flows, the plant & equipment at $44.460m is obvious, but what about the "Product Development Expenditure"? Would you consider that capital in nature - it would obviously have a big impact on any FCF calculation if included.
What's the point of calculating FCF? As the name implies, free cash flow is cash flow which the owner is "free" to do anything with. They can pay dividends, return capital, retire debt or invest in new business opportunities.
So FCF = Net operating cash flow minus non-discretionary capital expenditure (or sustaining capital often used in mining companies).
Deciding whether a capital expenditure cashflow is discretionary or sustaining can be difficult at times, and there are often grey areas. In general, something that earns you new additional income is most likely discretionary, something you spend to make sure you keep earning your existing income is non-discretionary.
One way to decide is to look back at a few years and see if the same item keep popping up. For NUF, the product development expenditure from 2011 to 2014 $37.4m, $34.3m, $51,9m and $59.7m. So it looks pretty much like it is non-discretionary. If you look across the revenue line, from 2011 to 2014, it went from $2.27B to $2.16B to $2.46B to $2.7B. So it's difficult to assess if the product development expenditures have resulted in higher sales. In this case, I'd be conservative and say the full amount of this item is non-discretionary in nature. In fact, if I was the CFO I would just expense it and get a better tax deduction.
Using capital expenditure of $44.46m i get a FCF of 84.7c per share and if I use the formula suggested in the Buffet thread, IV=E/r then I get a very high IV for NUF - so I have either missed something really obvious - or I should place a buy order!
Again, you need to look across several periods to see if the cashflow is consistent over the periods. A business can have 1 or 2 periods of very strong cashflow by playing with working capital (collect receivables more and earlier, paying payables less later, reducing inventory etc). Sometimes it's a permanent reduction in working capital, other times it's just kicking the can down the road and massaging the results.
NUF over the years is probably doing FCF of $90-120m over the last 5 years, without too much trend in one direction or another. So that's what my reference point would be until some consistent change is evident/probable.
If you have time take a look at the dramatic change in operating cashflow between half year and full year for NUF, and analyse where the differences arise from. And for a trader, see how the market reacted to the reported figures.
( wondering why financing cash flow doesnt play a part in the calculation).
Because financing cashflow is a function of how the business is financed. It has little impact on the actual operation of the business. If I am buying a business, the FCF is what it is (with due adjustment to the interest payment), regardless of whether I am buying it with 100% equity or 90/10 debt/equity.
Financing cashflow decisions are the result of FCF. i.e. whether they pay a dividend, repay debt or need to borrow more to invest/operate.
Thanks! Ok, I am back on board, very relaxing week in the end, lots of mud crabs and oysters off the rocks!