Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks (Wiley Finance) [Hardcover]

George C. Christy (Author)

Book Description

ISBN-10: 0470391758 | ISBN-13: 978-0470391754 | Publication Date: February 9, 2009 | Edition: 1

The purpose of this book is to explain Free Cash Flow and how to use it to increase investor return. The author explains the differences between Free Cash Flow and GAAP earnings and lays out the disadvantages of GAAP EPS as well as the advantages of Free Cash Flow. After taking the reader step-by-step through the author's Free Cash Flow statement, the book illustrates with formulas how each of the four deployments of Free Cash Flow can enhance or diminish shareholder return. The book applies the conceptual building blocks of Free Cash Flow and investor return to an actual company: McDonald's. The reader is taken line-by-line through the author's investor return spreadsheet model: (1) three years of McDonald's historical financial statements are modeled; (2) a one-year projection of McDonald's Free Cash Flow and investor return is modeled. Five other restaurant companies are compared to McDonald's and each other using both Free Cash Flow and GAAP metrics.

Editorial Reviews

Review

"Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks helps keep the investor focused on what truly matters to value creation--Free Cash Flow." --Charles W. Mulford, Invesco Chair and Professor of Accounting, College of Management, Georgia Institute of Technology, cofounder of Cash Flow Analytics, LLC

"GAAP earnings are more theology than science. They are a series of assumptions that lead us to what we 'believe' earnings to be. As George Christy thoroughly explains, Free Cash Flow definitively reflects the true value of a company. After more than a decade of roving market bubbles, it is refreshing to read this work of fundamental analysis pointing to successful investing. I read it as a refresher course to my CFA certification." --Boniface A. Zaino, CFA, Managing Director, Royce & Associates, LLC

"George Christy has it right--to value a business you must follow the cash. What else counts?" --Bruce Berkowitz, President, Fairholme Funds, Inc.

"This book provides the reader with the concepts, the context, and the tools necessary to invest successfully in a global market that has become increasingly challenging for all investors, both institutional and individual. I applaud the author's efforts and recommend this book to all investors seeking shareholder value creation." --From the Preface by William W. Priest, Chief Executive Officer, Epoch Investment Partners, coauthor of Free Cash Flow and Shareholder Yield: New Priorities for the Global Investor

From the Inside Flap

For years, GAAP earnings per share was the financial metric of choice for virtually all professional equity investors. However, increasing problems with this approach, combined with a growing appreciation of investment economics, have caused many investors to turn to Free Cash Flow as their primary financial metric.

Even with the growing popularity of Free Cash Flow, the lack of detailed information in this field has made it difficult for many investors to integrate Free Cash Flow into their daily investment discipline. That's why George Christy—a financial executive and corporate banker with over thirty years of experience—has created Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks.

Filled with in-depth insights and practical advice, this reliable resource shows you how analyzing a company's financial performance can put you in a better position to pick winning stocks and improve the overall returns of your portfolio. Throughout the book, Christy explains the differences between Free Cash Flow and GAAP earnings, and describes the advantages of Free Cash Flow. He also takes you step by step through the Free Cash Flow Statement®—which focuses on the primary drivers of investor return: revenues, cash operating margin, and use of capital—and illustrates how each of the four deployments of Free Cash Flow can enhance or diminish shareholder return.

In order to put the ideas outlined in perspective, Christy applies the conceptual building blocks of Free Cash Flow and investor return to an actual company—McDonald's—and goes line by line through the downloadable Free Cash Flow Worksheet® that integrates the primary components of share value into an investor return model. Five other restaurant companies are compared to McDonald's, and each other, using both Free Cash Flow and GAAP metrics.

Rounding out this detailed discussion of Free Cash Flow, Christy shows you how to assess a CEO's commitment to investor return by analyzing three key sources, and explains how to use the Free Cash Flow Worksheet in your stock search, from finding candidates with screeners to making buy, hold, or sell decisions.

Cash is the essence of shareholder value, and with Free Cash Flow as your guide, you'll quickly learn how to use this important metric to find, and profit from, great stocks.

The Free Cash Flow Statement® and the Free Cash Flow Worksheet® were specifically developed by the author for this book. Be sure to see the detailed Table of Contents on page IX. Free Cash Flow goes where no other investment book has gone before.

See all Editorial Reviews

Product Details

• Hardcover: 181 pages
• Publisher: Wiley; 1 edition (February 9, 2009)
• Language: English
• ISBN-10: 0470391758
• ISBN-13: 978-0470391754
• Product Dimensions: 6.4 x 0.9 x 9.4 inches
• Shipping Weight: 13.6 ounces (View shipping rates and policies)
• Average Customer Review: 3.2 out of 5 stars  See all reviews (4 customer reviews)
• Amazon Best Sellers Rank: #834,520 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

21 of 23 people found the following review helpful:

4.0 out of 5 stars Easy to understand cash flow analysis., May 15, 2009

By 

Ratatosk (Europe) - See all my reviews

This review is from: Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks (Wiley Finance) (Hardcover)

This book is about cash flow analysis with emphasis on how much excess cash is generated by a company, also known as the Free Cash Flow, and which may deviate significantly from the reported Net Income hence revealing that a company is either more or less profitable than its Net Income suggests. For the most part the book is well written and easy to read.

The book was written by a former banker who focused on whether a company generated enough cash to repay its debt. I like that angle and combined with the book's simple language it is the best book for analysing cash flows that I am aware of. The book could however be improved in a few places which is why I haven't given it 5 stars. In particular I would have liked a deeper explanation and discussion of why the author has chosen that particular definition of Free Cash Flow as opposed to other definitions, e.g. why working capital changes are included since these may also be of a non-recurring nature. I would also have liked a deeper discussion on how to treat debt in the analysis, whether to deduct it in valuation or whether one should assume the same debt level could be sustained for eternity.

The book also includes Excel spreadsheets for calculating Free Cash Flow and these are made available for download on the internet. The book gives a long and detailed description on how to complete and interpret these spreadsheets. You will probably skip most of this description on a first reading and only use it for later reference, but it is very good to have when learning to use the techniques for computing Free Cash Flow, and more books in finance should have such detailed descriptions of their methods.

The book is recommended for people already experienced in analysing financial statements. While determined novices may also use this book for learning these things, I do recommend starting out with getting a proper understanding of financial statements first, for example by starting with the book Financial Statements by Thomas Ittelson.

10 of 11 people found the following review helpful:

4.0 out of 5 stars Cash is king, September 20, 2009

By 

graham - See all my reviews

This review is from: Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks (Wiley Finance) (Hardcover)

Bruce Berkowitz sums it up best on the cover, follow the cash and you can value the business. I found the book excellent in leading you through the balance and income statements and most importantly deciphering just how much cash is being generated. The free cash flow talked about in the book seems to approximate Buffet's "owners earning" but it helps in dealing with the tricky aspect of adjusting those earnings to deal with the full business cycle. The book references excel sample sheets throughout and details the methodology behind them in a clear and concise manner, this is not to say it is easy, sometimes you really have to think, but the answers are there. Thoroughly enjoyed the book and have made several very successful investments using it as part of my toolset to value a business. Highly recommended

18 of 23 people found the following review helpful:

2.0 out of 5 stars Oversimplification creates problems, August 21, 2009

By 

R. Reece (Orinda, CA United States) - See all my reviews
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This review is from: Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks (Wiley Finance) (Hardcover)

The author's definition of operating cash flow (from which he derives a profit margin that is important in his selection process) has a major flaw. In excluding all working capital changes from operating cash flow, his model misevaluates companies that are forced to make large accruals for deferred revenue. Any company that recognizes revenue ratably (over the term of a contract) falls in this category. Changes in deferred revenue accruals flow back into cash flow in the working capital line. This is one of the most important adjustments one must make to understand the earnings of companies with ratable revenue recognition.

The simplistic analysis of capital expenditures also causes many problems that lead one to cast out too many good stocks. Take for example WMS, a maker of slot machines. By the author's method, free cash flow is down 24% year over year. Why is the stock up about 40% over that span? A large chunk of WMS's capex is the cost of machines that are leased by casinos rather than purchased. WMS gets more than $60 a day in revenue from each machine, on average.

How does one evaluate the ROI? A machine might cost WMS $5,000-$8,000 to make. A casino needs to keep the machine on its floor little more than three months for WMS to get paid back for its investment. And when the casino returns the game to WMS, the company can refurbish it cheaply and re-lease it, or sell it outright.

WMS has grown gross cash flow (the author's version of operating cash flow) for four straight years, 26% CAGR, 250% increase. Over that span the stock little more than doubled. Perhaps it's still inexpensive now, or maybe it was overvalued four years ago.

WMS will never be inexpensive on free cash flow until the company ceases growing leased machine placements, which of course would be a bad thing. In such a case the author's method works in reverse, missing the growth story and finding a high ROI company only when its best days are behind it.