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Topic: Free Cash flow. Is this the only thing?

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PrashantS
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Topic: Free Cash flow. Is this the only thing?
Posted: 20/Nov/2007 at 10:56pm

Originally posted by basant

Negative cash flow from operations: I am quietly sitting on a 85 bagger in Pantaloon (rights/split adjusted) with negative operating cash flow since the time I bought it in early 2003!

That is so nice to hear Basantji...it is some achievement ....I dont know how many people I know have done that....more than the money more than being right you did sit tight ...Bravo

Edited by basant - 20/Nov/2007 at 11:18pm

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kaushalchawla
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Posted: 20/Nov/2007 at 11:05pm

Originally posted by basant

Negative cash flow from operations: I am quietly sitting on a 85 bagger in Pantaloon (rights/aplitadjusted) with negative operating cash flow since the time I bought it in early 2003!

I think "Cash Flow" factor should be looked at when the company/sector has matured and stable.

A growing company will always need lot of money for capex etc and hence cash flow will not give the correct picture.

Please correct me if i am wrong.

Warm Regards,
Kaushal

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italics
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Posted: 20/Nov/2007 at 11:11pm

Basantji, this is something that has confused me time and time again. Just about every expert/guru seems to stress the importance of free cash flow. In fact the classical defination of intrinsic value is also based around free cash flow. And no less a person than prof. mankekar has said that the intrinsic value of a company is determined by it's cash flow.

Yet on the other hand, time and time again i see many fold multibaggers come from company's that are cash flow negative for long periods - PRIL is a great example. I'm sure so was Bharti when it started out and countless other young growing companies.

So please tell of what significance is cash flow? And what is the right perspectiive to look at it? Because there seems to be a huge contradiction in terms of what we learn, and what actually happens in the market.

It would be great if you could give us your thoughts on cash flow and end this huge confusion in my mind once and for all

I would really like to know how you view cash flow and how much importance you place on it.

Thanks

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basant
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Posted: 20/Nov/2007 at 11:12pm

Originally posted by kaushalchawla

I think "Cash Flow" factor should be looked at when the company/sector has matured and stable.

A growing company will always need lot of money for capex etc and hence cash flow will not give the correct picture.

Please correct me if i am wrong.

Absolutely. It is like saying that you would not buy companies that do not pay dividends and that means you would have missed Bharti because it has never paid dividends.

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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italics
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Posted: 21/Nov/2007 at 3:07pm

So of what use is cash flow?

When and why should it be used? basantji do you view and use cash flow at all, is it a consideration at all for you and if so how imp?

Thanks

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basant
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Posted: 21/Nov/2007 at 4:19pm

I look at sustainable RoE and RoCE which in one way saves you into high capex busienss or free cash flow. Generally low RoE companies have all problems relating to cash flows etc.

Personally I do not like capex intensive companies. Now if I own XYZ and XYZ is growing at 30% with a RoE of 30% and has negative cash flow because it is investing and dilutes equity and raises debt but the RoE over the next 6 months increases back to 30% then I have no problems looking at the negative cash flow.

Generally as I said before high capex companies (low free cash flow) will have low RoEs over a longer period of time.

Edited by basant - 21/Nov/2007 at 9:52pm

'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

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Vivek Sukhani
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Posted: 21/Nov/2007 at 5:50pm

Free cash flows are quite quite important. And i am not talking about market prices at all......prices go up for various reasons and sometimes a company whose office is in no-one's knowledge also shoot upwards. Now coming to the moot point why cash flows are important is that, thats what add up to the worth, be it reserves or dividend.

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italics
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Posted: 21/Nov/2007 at 9:01pm

Hi vivek, my question was more from the aspect of how cash flow is used to judge a company's intrinsic value. Obviously for young, growing comanies the yardstick is different as basantji has illustrated.

If company's that are cash flow negative for years on end can still prove to be very profitable investments, then obviously using cash as a yardstick in these companies would be wrong.

It's just that in theory cash flow is always said to be an important yartdstick for measuring a company's value but in practise it is not so cut and dried. So i was trying to understand what is the relationship of Cashflow to comp value in the real world.

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