Free Cash Flow: Back to Basics

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.

[ZorakWars]

It's hard to believe that knowledge like this is free to consume. Thank you for all the videos you share.

[rpaalevato]

Now I see what everybody says you are the best teacher. I was researching about this topic for a week and couldn't get a clear answer. My guess is a lot of folks who says they understand finance don't know why they are doing what they are doing and just repeat some formula they learned from somebody.
Thank you

[josipseremet]

My investing mentor was a student of yours at NYU. I am amazed at his knowledge and breadth of wisdom. As in awe I am of him, he is in awe of you and your wisdom and knowledge you passed on to him. I see and getting the same sense of awe. Thank you again for sharing your knowledge, experience and wisdom.

[arcarsan]

Long live Mr. Damodaran, the teacher I would have loved to have during my college years, thank you YouTube 🙌🏻

[MotivationInvest]

Exceptional Masterclass, a filter for the noise of the stock market. I am convinced many people talk about "cash flows" but don't fully understand the definition.

[nebojsascepanovic]

Dear professor, using your methods and lectures you so generously share with us, I find Meta and Alibaba hugely undervalued. I am aware of all risks and situation in China, but I simply cannot imagine future cash flows that could be so low to justify this market price, especially for Alibaba.

[alecouto]

Thank you professor, always great to revisit the basics.

[mohamedmadkour]

Many thanks professor, a masterpiece as usual. Thanks a lot for sharing your very valuable knowledge.

[richullingfivefivefive]

Excellent. I would add though that: EBIAT (or NOPAT), calculation neglects the effect of the tax shield provided by interest expenses. That is why it’s important to account for this when estimating the cost of debt part of the WACC.

[ramjiYahoo]

Doing Microsoft's Free Cash Flow to Firm, Free Cash Flow to Equity holders in - Microsoft's Excel- Great learning session Prof sir as always

[loremipsum]

Thank you very much for sharing your knowledge, Professor Damodaran. 🙏

[motothedog]

Thank you! Very helpful! I am saving this to my favorites!

[maljones]

I am forever indebted to you for this level of transparency of wealth of knowledge

[impushprajyadav]

Love his lectures Thanks for doing all this for free 🙏

[chandrannatarajan]

Thank you professor 🙏. Stay blessed always 🙏

[minhanhledoan]

Such a great insight knowledge. Thank you so much !

[gkbchua]

Thank you Professor Damodaran. It was a very valuable lecture for me.

[itodohaugustine]

Thank you so much Sir for the explanations. I'm confident in FCF things now.

[rizvinnasser]

Thank you so much sir . I am an aviation personnel, who recently started a career in value investing to run in parallel .

All your videos have refined my views and mental models .

Especially these basic fundamental videos have been of profound use to me, I have downloaded it and will be moving to my forever vault .

If you could share more videos on basics like balance sheets, p/l statements, reading annual reports, it would be a golden ticket to my future endeavours .

Thank you so much. Regards. From India ..

[matheusvazporfirio]

Thank you professor, a masterclass for sure