Our analyses of 100-plus corporations indicate that an untapped 20 percent of market capitalization resides in the balance sheet, within those areas of operational excellence (such as inventory turns and Dso) that determine capital efficiency and
free cash flows. A recent publication, "Cash Flow and Performance Measurement - Managing for Value," by the research affiliate of the Financial Executives Institute, indicates that a growing number of senior executives are beginning to understand that expectations about future cash flow drive stock valuation.
Table 1 Descriptive Statistics for 80 Mutual Life Insurers: 1985 through 1993 Standard Variable Mean Deviation Minimum Maximum Policyholder Dividends 112,440 367,030 0 2,453,00 Paid (in thousands)
Free Cash Flow 2,275.20 8,899.90 -1.46 82,800 (in millions) Deviation in Free 571.87 2,674.10 0.032 42,350 Cash Flow (in millions) Volume of Insurance 25,547 99,298 0.014 1,964,000 in Force (in millions)
Standardizing the accounting for all of these items permits the
free cash flow process to pursue its main objective: determining the condition of the enterprise after extraneous items, nonrepetitive items, and accounting variations are removed.
Adjusted EBITDA and Pro-forma
Free Cash Flow should not be considered an alternative to, or more meaningful than, Net Income, royalty income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP.
Free cash flow generation has further strengthened the balance sheet, reducing net debt to $959 million.
* Group
free cash flow improvement of [pounds sterling]309m to [pounds sterling]568m driven by Core
free cash flow of [pounds sterling]641 m (2017: [pounds sterling]318m).
Total free cash held by the industry firms in our research sank to the most recent low during the third quarter of 2017; but they reversed course and have since increased quarterly
free cash flows, culminating in a multi-year high at the end of 2018.
Following this model, we can see that the ideal EV/Ebitda ratio of a stock goes up when its
free cash flow increases as percentage of Ebitda or its cost of capital decreases.
According to the company, this improvement in
free cash flow is primarily driven by a strong order intake.
Chief Financial Officer Stephen Daintith went further when asked by analysts and said that
free cash flow could reach 1.2 billion pounds by 2020.
Many investors see
free cash flow as a more meaningful metric.
