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Free Cash Flow Valuation Techniques

This document discusses key financial concepts used in estimating future free cash flows (FCFs) for firm valuation. It defines metrics like net operating profit, fixed asset turnover ratio, financial ratios, percent of sales income statement, gross profit margin, operating profit margin, EBIT, net operating working capital, accounts receivable days on hand, inventories days on hand, evolution of inventories, accounts payable days on hand, and change in net operating working capital. These metrics are used to project a firm's future performance and cash flows.

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13 views1 page

Free Cash Flow Valuation Techniques

This document discusses key financial concepts used in estimating future free cash flows (FCFs) for firm valuation. It defines metrics like net operating profit, fixed asset turnover ratio, financial ratios, percent of sales income statement, gross profit margin, operating profit margin, EBIT, net operating working capital, accounts receivable days on hand, inventories days on hand, evolution of inventories, accounts payable days on hand, and change in net operating working capital. These metrics are used to project a firm's future performance and cash flows.

Uploaded by

toti
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Corporate

Finance Professional Certificate MOOC


Course 2, The Free Cash Flow Method for Firm Valuation
Module 3, Estimating Future Free Cash Flows (FCFs)

Net Operating Profit (NOP) Fixed Asset Turnover Ratio
!"#$%

!"#$% − '()! − (* ,-*$.%$% − /"-$% 0. ,12/ .$344,

This ratio measures how effectively a firm uses its
assets. A higher number would imply that more sales
are generated per dollar of fixed assets.
Financial Ratio Net Operating Working Capital (NOWC)
A ratio between two items in the firm financials, for
instance, COGS to Sales. 5(6' = ('8 − ('9

NOWC = Net Operating Working Capital
OCA = Operating Current Assets
OCL = Operating Current Liabilities
Percent of Sales Income Statement Accounts Receivable Days on Hand
A table which depicts the ratio of different items in the
Income Statement to Sales. 8::0;.3% <$:$=>"?#$

@"=#A !"#$%

Daily Sales = Sales/365
Gross Profit Margin Inventories Days on Hand
)B0%% 4B0C=3 = !"#$% − '()!
2.>$.30B=$%

The ratio of Gross Profit to Sales. @"=#A '()!

Daily COGS = COGS/365
Operating Profit Margin Evolution of Inventories

DEFG
-or- QRSTRUVWXTYUZ[ = QRSTRUVWXTYU + ]^W_`aYTY
HIJKL
− bcde
(*$B"3=.N ,-*$.%$%
)B0%% 4B0C=3 M"BN=. − ( ) 2.>$.30B=$% fZg = final inventory in a period
!"#$%
2.>$.30B=$%f = inventory at the beginning of a period
EBIT = Earnings Before Interest and Taxes
Change in NOWC Accounts Payable Days on Hand

8::0;.3% <$:$=>"?#$ + 2.>$.30B=$% 8::0;.3% 4"A"?#$
− 8::0;.3% 4"A"?#$
@"=#A 4;B:ℎ"%$%

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