Free Cash Flow Excel Model Tricks
Free cash flow Excel models are the foundation for the majority of analyst's discounted cash flow valuations. Here we discuss a few strategies that will help in modeling market value more accurately.
An example of the most interesting parts of modeling cash flows is getting the relationships right relating to the cash flow and income statements. This can be challenging when starting with complicated GAAP financial records, since the public accounting view of a company's financials is not organized for DCF purposes. Loads of companies put non-operating items such as depreciation and amortization in the operating earnings category. Nearly all income statements don't have an effective breakdown of EBIT, etc. Extraordinary things are contained in some areas. Similarly, the balance sheet may have prior period charge offs that affect property values but are not actually income transactions. All of these types of one-off items have to be backed out or modified to make sure the items going into the free cash flow excel model are proper.
Now, what's the variation between free and operating cashflows? Many people incorrectly think that earnings before interest, taxes, depreciation and amortization is actually operating cashflow. This is not accurate. Under recognized taxation rules, company taxes are generally paid on income immediately after deducting depreciation, amortization, and interest expenses. But a correct cashflow estimate won't consider amortization and depreciation. Interest expense is handled in the funding category. You need to calculate operating cash flow as earnings just before interest, depreciation, and amortization, but after any tax charges. This calls for computing and subtracting estimated income tax using operating income as the base within your free cash flow Excel spreadsheet.
Finally, how does one handle net operating loss tax credits and ownership interests in joint ventures and the like? In order to identify the cash benefit of NOL credits, the firm must have taxable income, and these NOLs can only be used up to the amount of available positive income in any given tax year. This means you have to tie the free cash flow calculations to the earnings statement accurately. Cash equivalent items such as short term receivables, and so on might become accessible for value creation. A minimum sum of money and temporary investments have to be kept on the books to be viable. So you should make a decision whether to include all of it in the discounting calculations. Partnership interests can be challenging because they might or might not pass income flows back to the parent, can require ongoing investments, and often provide related operating benefits back to the corporation. This makes the cash flows tricky to frame correctly in the free cash flow Excel model.
Article Source: FxTradingStock.com
About the Author
If you are interested in seeing the capabilities of a properly designed free cash flow excel spreadsheet, you can find one here http://www.financial-edu.com/cash-flow-valuation-model-for-excel.php
by: Erica Smith
Total views: 141
Word Count: 450
Date: Tue, 28 Dec 2010
Publish/Share this article
To use this article on your site click here to get the HTML code
Rating: Not yet rated
Login to vote
Related Articles
How to Invest in 2011 and Beyond Without a ClueWhat Is Forex Trading?
Quick Way To Trade In Shares
ATM Calendar Spreads, Are You Aware Of The Hidden Gotchas?
Emini Day Trading Requirements
The Coming Death Of The Dollar
Fantastic Fundraising Suggestions
Winning Big In The Share Market
