FCF, Working Cap

Question 1

What is FCF?

Answer 1

the only cash flows regarding what a company needs to run to avoid being shut down
how much cash flow it generates from core business after paying for funding sources

Question 2

What is the FCF formula?

Answer 2

FCF = CFO - Capex

Question 3

Why is CFO counted in the FCF formula?

Answer 3

B/c only CFO items are essential for the business

Question 4

Why is capex counted in the FCF formula?

Answer 4

It’s the only item in the CFI CFF needed for biz.

Question 5

What is FCF used for?

Answer 5

Estimate ability to generate cash flow

Question 6

What does it mean if FCF is positive?

Answer 6

Good. Doesn’t need outside funding to stay afloat

Question 7

What does it mean if FCF is negative?

Answer 7

Bad

Question 8

How can FCF be manipulated?

Answer 8

Play with capex, depreciation

Question 9

What is working capital?

Answer 9

capital of a business which is used in its day-to-day operations

Question 10

What is the working capital formula?

Answer 10

current asset - current liab

Question 11

What does change in working capital mean?

Answer 11

how much cash flow is going to differ from NI

Question 12

What is the formula for change in working capital?

Answer 12

old WC - new WC

Question 13

What does a -ve change in working capital mean?

Answer 13

lower cash flow, lower valuation

Question 14

What does a +ve change in working capital mean?

Answer 14

higher cash flow, higher valuation

Question 15

Why is change in WC -ve when WC is +ve in real life?

Answer 15

• not wrong
• It’s due to how things are recorded on the CFS
• CFS: -ve figures show an outflow of cash, +ve shows an inflow of cash
• eg. $100 spend on inventory would result in a $100 increase in current assets and WC, but in change in WC it would be -ve
• that’s why the sign in change in WC is different

Question 16

What is a pro of having -ve WC?

Answer 16

Co has high deferred rev -> good b/c collected lots of cash before delivery

Question 17

What is a con of having -ve WC?

Answer 17

High accounts payable but low accounts receivable -> not collecting enough cash before delivery

Question 18

What does working capital measure?

Answer 18

measure of liquidity and short term health

Question 19

What does +ve working capital mean?

Answer 19

can fund operations

Question 20

What does -ve working capital mean?

Answer 20

current assets don’t exceed current liabilities-> trouble growing/ paying back creditors

Question 21

When is it a good thing that FCF is -ve?

Answer 21

If capex unusually high one year -> show investment

Question 22

What happens if FCF is -ve for a long time?

Answer 22

Bad. Raise capital and restructure.

Question 23

What situation makes for -ve FCF?

Answer 23

sales are decreasing year on year

Question 24

When is it semi-ok to have -ve FCF?

Answer 24

startup- short periods of time but not for more mature companies