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I took your "Corporate Valuation Methodologies" class and was impressed with the quality of the class and hope to take more in the future.
I am struggling to find a valuation procedure that I'm comfortable with. The denominator should be EV. The appropriate numerator, in my view, should be FCF. (whether this is levered or unlevered; I don't even mind if it is levered since I'm usually thinking about buying the equity). I'm trying to find out the likely (initial) return for a buyer of the business. Warren Buffett has stressed the point that FCF should take into account an allowance for maintenance capital expenditures (he refers to EBITDA as bullshit earnings since depreciation is the worst kind of expense, i.e., an expense you have to pay for up front with your initial capital outlay). When I get financial information from say, Yahoo Finance, I cannot find out what maintenance capital expenditures are (and this is not unusual even with analyst reports). I can find operating cash flow.
My question relates to finding a proxy for free cash flow that is really available to the business owner and takes into account maintenance capital expenditures. Would using operating cash flow be appropriate (keeping in mind that it does not account for maintenance cap ex)?
For example, if I go to Yahoo Finance and type in WMT and then click on key statistics, it gives me an EV of 240B, EBITDA of 24.5B, operating CF of 18.4B and levered FCF of 2.2B. When I'm trying to value the business I don't care about actual capital investments and expenditures, I'm only interested in FCF minus maintenance cap ex (for the purposes of valuation).
In the absence of a guesstimate for maintenance cap ex, would operating CF be a good proxy or would you suggest another term that would involve more tweaking? Read More