In every market correction, investors discover old truths, and this one has been no different. Not only have you seen the conversation shift from scaling up to profitability, but from earnings to cash flows. Managers and investors are suddenly discovering the importance of free cash flow, but as I argue in this session, the definitions of free cash flow range from the self-serving to the delusional. I look at the mechanics of computing free cash flows, to equity and to the firm, and why you may come up with different values depending on whether you are using FCFE to explain what happened in a period, as the base for forecasting future cash flows in intrinsic valuation or as a scalar in pricing. I push back against the notion that positive free cash flows are, by themselves, indicators of company health and note how cash flows evolve as companies age. While free cash flows remain the go-to measure in intrinsic valuation, I don't think that they are good pricing metrics, in most sectors.
Slides: https://www.stern.nyu.edu/~adamodar/p...
Microsoft Annual Report for 2021: https://www.microsoft.com/investor/re...