One other thing to bear in mind is where cash flows to interest are placed in the cash flow statement. Some companies put it under operations and others under financing. In my opinion the latter is correct, however when determining cash flows to equity you must be sure that these have already been subtracted out, and if not be sure to account for it.
You had another video before for owners earnings that had net income + depreciation & amortisation - changes in working capital - capex on maintenance. Is this the same thing?
I could be wrong but probably from equity we need to remove cash in hand from capital as it is not invested and short term investment as we care about long term prospects/investments
Hi Hamish, thanks for the v useful content. In the spreadsheet (last version) you defined the CASH FLOW FOR OWNERS as OPERATING CASH FLOW minus MAINTENANCE CAPEX. Yet, this gives a different number from the equation you talked about in the video, while starting from the NET INCOME, adding DEPRECIATION and NON-CASH CHARGES, and changes in WORKING CAPITAL, minus MAINTENANCE CAPEX. I got a bit confused while getting differnet outcomes. Appreciate it a lot if you could help me with this... Thanks a lot, Saher
Started good. Good verbal explanation. And then NO visualS to match with explanation( except one at start ) or not enough. Had to go to search for other video or book. Honest feedback.
Very well done video, thank you for the clear and concise explanation. Although I'm interested in the process of estimating maintenance CapEx, I also think subtracting total CapEx is more logical since a business needs to grow to stay competitive with its competitors. I imagine the theoretical case where our company would only spend maintenance capEx to stay "alive" and Comp. B would spend growth CapEx on top of that. Our relative market share would shrink with the years (it's just like mining pools for crypto currencies. If you don't upgrade your equipment you won't have as much mining power as everyone around you who is upgrading and hence won't yield as much which might end up in bankruptcy). Good video though, I very much appreciate it
Extremely helpful video, thank you for explaining thoroughly and in an easy way to understand!! One of my favorite if not my favorite you tuber on investing!
to find the maintenance capEX can you take the whole investment in PPE from investing activities and subtract the difference in PPE from the beginning of the year and the end of the year (balance sheet) plus depreciation costs ?
Based on Cash flow growth rate and average P/E ratio if I calculate that a stock may be trading at $100 a share in 5 years then paying $20 today may be a good price with a margin of safety. If today’s book value per share is $10, should I be willing to pay $30 per share or should I not add today’s book value per share to my buy price today? It would really help if you could answer this because I can see it two ways. 1. You should only care about the earning power of the company, or 2. If a company has $100 in book value it doesn’t make sense to not pay for this equity in the share price to acquire a share today, that would be like if my house was worth $100,000 and it was paid off and I sold the equity for free and just had the buyer pay a fair multiple of the future rents- is that right? Please help, it would be incredibly appreciated.
Hamish - this is very good content, thanks for sharing it and explaining it in an easily understandable manner - i’ve a question using the operating cash flow as reported to calculate earning power value. The question is i think there are times when this significantly understate the true earning power, for example companies in early stages of their growth will be spending a lot of brand, advertising, SGA expenses that relate to growth and i would have thought this should be adjusted as you will adjust for mcx .. any thoughts on that pls?
Hamish...just a thought.. . wouldn't it be easier and more accurate to just add the Dividend received to the book value growth from the previous year to get to actual "owner's earnings" for that year ? What do you think ?
Thanks for showing how to compute owner's earnings and to estimate maintenance capex. What adjustments, if any, would be necessary for MLPs & REITs that feature significant depreciation in their accounting?
I don't analyse or invest in either so I don't know how they differ to traditional public companies. But the principle is still the same. We are trying to find the total amount of cash left over after: (A) operating the business, and (B) maintaining long term assets
Hi Greg, Carefully look through the GAAP financials and go to the bottom of the pages and read the notes section first (This is where they always write in their tricky notes (Warren Buffett always advises us to start here first). See how and where they have placed the property valuations in the statements. I have found that some REIT's and Rest home companies put it in their income section. I subtract this off the income section for 2 reasons. * Firstly, the properties are not sold and have not actually realised any income at all until sold and the proceeds hit the account. I think these belong in the Asset column with the debt balancing out in the Liabilities and debt sections with any income from rentals, leases etc putting that exactly where this supposed to go. * Secondly, They always value these assets in an assumption that it could be sold in the most ideal market conditions and this can place a lot of pressure if it did actually need to sell as the market determines the price not the seller as such. (Of course both parties must agree on the price and terms to make it an actual transaction. Hope this gives you somewhere to look. - Cheers Westy
Hi Hamish, Would you not simply use the Net Free Cashflow? This gives you the Nett Cashflow after all operational expenses and then takes off the Capital Expenditure (Capex) and gives you the same answer.?!! It is already done for you in the cashflow statements on Barchart and gives you 9-10 years financial history.
Because we want maintenance capex, not total capex. Total capex includes cash spend on growing the business which increases value for shareholders. We want to know the total amount of cash returned to shareholders during a particular year which means we want to exclude growth capex from the calculation.
Hamish, thank you for your videos! Super useful and interesting :) Quick question related to the video, you said that the intrinsic value of the stock is basically calculated through a DCF of the CF4O, but this calculation gets you to the company´s enterprise value, so you are considering also the portion payable to debt holders... and at the end in my opinion it is not useful to contrast it with the stock market´s price to finally make an investment desition. Am I missing something here? Thank you Again!!
Hey, great video. Quick question. When you say that in order to estimate Apple's maintenance CapEx we should really understand their business. Which are the ways one can gain such an understanding, without having worked there all your life?
Hello mate, have a question. Do you include or exclude income tax for the total of owner earnings ? The example provided seems to be a US company where there is a "deferred income tax" line whereas aussie companies have income tax expense. Considering income tax or not has a huge difference in valuation. Thanks mate
Find Cash Flow For Owners for the previous year, estimate a growth rate, choose the investment return you want to target over the next 10 years, and enter those 3 numbers into the DCF tab on my spreadsheet
It really depends on the assumptions a company makes about its depreciation calculation and whether you think it's reasonable. Some companies knowingly inflate depreciation behind the scenes to understate earnings and pay less tax (I would say this is relatively rare). But assuming it's straight line, if you've got nothing else to go on, it's a decent estimate (but it's really important to know the residual value assumptions there as well, if they have been provided).
Great video with excellent information. Thanks for proving us with valuable information. Phil Town uses E.P.S estimate projections to come up with intrinsic value. Will that be about the same using a DCF analysis?
Yes it will be approximately the same as using eps in most cases. But CF4O protects you against managers who manipulate eps to make them seem more profitable than they are. It is much harder for a dodgy manager to manipulate the cash flow statement figures
Hey how do I contact u for 1 on 1 tutoring. I need help with my DCF. Also what stocks do i buy thx
lol Brandon!
hahahaha XD
One other thing to bear in mind is where cash flows to interest are placed in the cash flow statement. Some companies put it under operations and others under financing. In my opinion the latter is correct, however when determining cash flows to equity you must be sure that these have already been subtracted out, and if not be sure to account for it.
You had another video before for owners earnings that had net income + depreciation & amortisation - changes in working capital - capex on maintenance. Is this the same thing?
Great video! Always nice to see a UA-camr really get into the weeds of investing instead of the typical generic advice
This is an awesome video and you are a natural teacher! I had one question in your OE calculation. Why don’t you add the “tax provision” back in?
Great video Hamish and very informative as usual. I see we have a comedian among us. His videos are good also.
Thanks so much for the information and tips that you offered. You did a great job explaining this!
Thanks!
How do you feel about negative cash flow stocks (CapEx >operating cash flow)?
Thanks again for your video Hamish
I could be wrong but probably from equity we need to remove cash in hand from capital as it is not invested and short term investment as we care about long term prospects/investments
Hi Hamish, thanks for the v useful content. In the spreadsheet (last version) you defined the CASH FLOW FOR OWNERS as OPERATING CASH FLOW minus MAINTENANCE CAPEX.
Yet, this gives a different number from the equation you talked about in the video, while starting from the NET INCOME, adding DEPRECIATION and NON-CASH CHARGES, and changes in WORKING CAPITAL, minus MAINTENANCE CAPEX.
I got a bit confused while getting differnet outcomes. Appreciate it a lot if you could help me with this...
Thanks a lot, Saher
Same problem with me
Net operating cashflow minus capex(which is found in the investing section of the cashflow statement
Started good. Good verbal explanation. And then NO visualS to match with explanation( except one at start ) or not enough. Had to go to search for other video or book. Honest feedback.
Very well done video, thank you for the clear and concise explanation. Although I'm interested in the process of estimating maintenance CapEx, I also think subtracting total CapEx is more logical since a business needs to grow to stay competitive with its competitors. I imagine the theoretical case where our company would only spend maintenance capEx to stay "alive" and Comp. B would spend growth CapEx on top of that. Our relative market share would shrink with the years (it's just like mining pools for crypto currencies. If you don't upgrade your equipment you won't have as much mining power as everyone around you who is upgrading and hence won't yield as much which might end up in bankruptcy). Good video though, I very much appreciate it
Extremely helpful video, thank you for explaining thoroughly and in an easy way to understand!! One of my favorite if not my favorite you tuber on investing!
Great video! Thank You very much Hamish! I learn a lot of important things about value investing from each of your videos.
to find the maintenance capEX can you take the whole investment in PPE from investing activities and subtract the difference in PPE from the beginning of the year and the end of the year (balance sheet) plus depreciation costs ?
Bro keep making such good informative video. Realy loved it. Been try from many months to figure out how to calculate intrinsic value
Hey Hamish, thanks for this - How would you go about deriving CapEx (Growth & Maintenance) for banks, financial, insurance companies
Based on Cash flow growth rate and average P/E ratio if I calculate that a stock may be trading at $100 a share in 5 years then paying $20 today may be a good price with a margin of safety. If today’s book value per share is $10, should I be willing to pay $30 per share or should I not add today’s book value per share to my buy price today? It would really help if you could answer this because I can see it two ways. 1. You should only care about the earning power of the company, or 2. If a company has $100 in book value it doesn’t make sense to not pay for this equity in the share price to acquire a share today, that would be like if my house was worth $100,000 and it was paid off and I sold the equity for free and just had the buyer pay a fair multiple of the future rents- is that right? Please help, it would be incredibly appreciated.
Hamish - this is very good content, thanks for sharing it and explaining it in an easily understandable manner - i’ve a question using the operating cash flow as reported to calculate earning power value. The question is i think there are times when this significantly understate the true earning power, for example companies in early stages of their growth will be spending a lot of brand, advertising, SGA expenses that relate to growth and i would have thought this should be adjusted as you will adjust for mcx .. any thoughts on that pls?
Thank you mate!
So how can I use cash flow to value a business, what do I compare it against?
It almost reminds me of that book about 30 shades of grey
Hamish...just a thought.. . wouldn't it be easier and more accurate to just add the Dividend received to the book value growth from the previous year to get to actual "owner's earnings" for that year ? What do you think ?
Thank you again for this presentation. It was very educational and helpful for all of us young people who are trying to understand the stock market.
Could we use Depreciation as an estimate for maintenance Capex?
Excellent video!!
Thanks for showing how to compute owner's earnings and to estimate maintenance capex. What adjustments, if any, would be necessary for MLPs & REITs that feature significant depreciation in their accounting?
I don't analyse or invest in either so I don't know how they differ to traditional public companies.
But the principle is still the same. We are trying to find the total amount of cash left over after: (A) operating the business, and (B) maintaining long term assets
Hi Greg, Carefully look through the GAAP financials and go to the bottom of the pages and read the notes section first (This is where they always write in their tricky notes (Warren Buffett always advises us to start here first). See how and where they have placed the property valuations in the statements. I have found that some REIT's and Rest home companies put it in their income section. I subtract this off the income section for 2 reasons.
* Firstly, the properties are not sold and have not actually realised any income at all until sold and the proceeds hit the account. I think these belong in the Asset column with the debt balancing out in the Liabilities and debt sections with any income from rentals, leases etc putting that exactly where this supposed to go.
* Secondly, They always value these assets in an assumption that it could be sold in the most ideal market conditions and this can place a lot of pressure if it did actually need to sell as the market determines the price not the seller as such. (Of course both parties must agree on the price and terms to make it an actual transaction. Hope this gives you somewhere to look. - Cheers Westy
@@rent2ownnz Thank-you for the suggestions. A good opportunity to study the annual reports a bit more closely.
Very informative and helpful video👍. Can you please make a separate video on Finance Activity??
So what is the difference between Free Cashflow and Cashflow for owners vs Sustainable Free Cash Flow?
Seven Carlin subscriber here! 🙋♂️
Hey!
Hi Hamish, Would you not simply use the Net Free Cashflow? This gives you the Nett Cashflow after all operational expenses and then takes off the Capital Expenditure (Capex) and gives you the same answer.?!! It is already done for you in the cashflow statements on Barchart and gives you 9-10 years financial history.
Because we want maintenance capex, not total capex. Total capex includes cash spend on growing the business which increases value for shareholders. We want to know the total amount of cash returned to shareholders during a particular year which means we want to exclude growth capex from the calculation.
Hamish your videos are great but it would be great if tou add animations when you are talking.It will be easy to understand
What about operating working capital ... its said to be written in the owner's earning ?
Superb Hamish. Very nicely articulated. Keep more of 'em coming/
Thank you for the detailed explanation.
How do you find how many shares a company has in existence?
Hamish, thank you for your videos! Super useful and interesting :)
Quick question related to the video, you said that the intrinsic value of the stock is basically calculated through a DCF of the CF4O, but this calculation gets you to the company´s enterprise value, so you are considering also the portion payable to debt holders... and at the end in my opinion it is not useful to contrast it with the stock market´s price to finally make an investment desition.
Am I missing something here?
Thank you Again!!
Hey, great video. Quick question. When you say that in order to estimate Apple's maintenance CapEx we should really understand their business. Which are the ways one can gain such an understanding, without having worked there all your life?
super helpfull thanks Hamish
Very clear, great content
Hamish. will you consider putting your recording equipment in your comments or make a vid about it? thanks.
amazing content man! thanks for your help
Hello mate, have a question. Do you include or exclude income tax for the total of owner earnings ? The example provided seems to be a US company where there is a "deferred income tax" line whereas aussie companies have income tax expense. Considering income tax or not has a huge difference in valuation. Thanks mate
Great presentation. Now how do you use Cash Flow for Owner's to calculate a valuation for the company?
Find Cash Flow For Owners for the previous year, estimate a growth rate, choose the investment return you want to target over the next 10 years, and enter those 3 numbers into the DCF tab on my spreadsheet
Hey Hamish! Thanks for the info, but what has happened to your '3 stocks Im watching' or 'Portfolio review' video series?
Is this the same as free cash flow?
Isn't cash flow for owners the same thing as Free Cash Flow?
for quick calculations?
What platform do you use to trade us stocks. Commsec international is okay but to slow
Hamish if you substrack the total Capex to get the free cash flow for ownwers.......whoundont it be the same as using EPS?
Earnings may include credit
Gute Arbeit
How accurate would using ‘depreciation for the year’ as maintenance capex be? Thanks and keep up the awesome videos!!!
It really depends on the assumptions a company makes about its depreciation calculation and whether you think it's reasonable. Some companies knowingly inflate depreciation behind the scenes to understate earnings and pay less tax (I would say this is relatively rare). But assuming it's straight line, if you've got nothing else to go on, it's a decent estimate (but it's really important to know the residual value assumptions there as well, if they have been provided).
Awesome
And what about taxes?
taxes are already taken into account in the Operating Cash Flow figure!
Great video with excellent information. Thanks for proving us with valuable information.
Phil Town uses E.P.S estimate projections to come up with intrinsic value. Will that be about the same using a DCF analysis?
Yes it will be approximately the same as using eps in most cases. But CF4O protects you against managers who manipulate eps to make them seem more profitable than they are. It is much harder for a dodgy manager to manipulate the cash flow statement figures
Learning a lot! Sharpp
Hello Hamish! What´s the difference between levered FCF and C4Owners? I see some analyst use levered FCF and the number is bigger than C4O. Thank you.
*I think* it's FCF/Shareholders Equity