In 2022, Nike generated $4.4 billion in FCF ($5.2 billion – $758 million). Investopedia defines FCF as the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Basically, it’d be your profit as the sole owner of the business. Free Cash Flow = Operating Cash Flow - Capital Expenditures Buffett’s “Owner’s earnings” and is easily calculated from the Cash Flow Statement. You may know it as Discounted Cash Flow (DCF).įree cash flow is a good proxy for Mr. Step 2: Review cash flow from investingįamed investor Warren Buffett believes the intrinsic value of a business is the sum of all future earnings (he calls it Owner’s earnings) of the business discounted back to today’s value. So Nike could easily pay off all long-term debt within 3 years using operating cash flow ($8.9 billion / $5 billion = 1.8 years). And for the past 5 years, Nike has averaged around $5 billion per year in operating cash flow. In 2022, Nike had $8.9 billion in long-term debt on the Balance Sheet. But can Nike pay off all its long-term debt within 3 years? For this, we need to look at the Balance Sheet. So we’ve already answered questions #1 and #2 above. I have no doubt Nike can continue to support its operations. And the company is cash flow positive even after backing out SBC ($5.2 billion – $638 million = $4.6 billion). In 2022, Nike generated $5.2 billion in operating cash flow. It comes as no surprise that Nike is cash flow positive. Let’s practice analyzing the Cash Flow Statement using Nike (NKE) as an example. It might seem like a lot, but you should be able to answer these questions within 5 minutes of reviewing the Cash Flow Statement. Is the company excessively diluting shareholders via SBC or secondary offerings?.Can the company pay off its long-term debt within 3 years using operating cash flow?.Is the company cash flow positive even after backing out Stock Based Compensation (SBC)?.Is the company generating positive cash flow and able to sustain its operations?.I focus on what I find most important, and ask a few basic questions: I’m a big proponent of keeping it simple, so I don’t scrutinize every component of the Cash Flow Statement in detail. Source: Jessica Olah / Investopedia Analyzing the Cash Flow Statement banks) such as principal repayment of a loan. This section includes cash paid to shareholders via dividends or share repurchases. Lastly, is cash from financing activities. Of particular importance is capital expenditures, which is a component of the free cash flow (FCF) calculation (more on this later). Investments may include the purchase or sale of assets (capital equipment), loans made to vendors or merger & acquisition costs. This section summarizes the cash flow from a company’s investments. Put another way, it answers the question of whether the company is generating or losing cash from its operations (i.e. In my opinion, this is the most important section because it shows all cash generated by (or used in) the operating activities of the company. What is a Cash Flow Statement?Ī Cash Flow Statement summarizes the movement of cash into and out of a company over a period of time. If it passes the test, it’s then time to dig even deeper. In this article, I’ll review a common sense approach to analyzing the Cash Flow Statement to determine if a stock warrants additional attention. In practice, I review all 3 financial statements in conjunction with one another and recommend you do the same. The Cash Flow Statement is typically the last of the 3 financial statements I review. Now it’s time to take a closer look at the Cash Flow Statement. We’ve already covered the Income Statement and Balance Sheet. This article is the last in a series showing beginner investors how to analyze a company’s financial statements.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |