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BoiseCFA's avatar

Re' your point on SBC getting added back to net income and working capital adjustments to arrive at Operating Cashflow, what I do is just subtract SBC back out along with capex to arrive at FCF.

Further, the argument can be made, as Aswath Damodoran advocates, that you should also deduct acquisitions before arriving at FCF--his argument is that why should companies have to count internal capex, but not external capex? If you don't deduct acquisitions, you are effectively allowing companies to show the growth in future years from those acquisitions--but without showing the cost of such investments in the past.

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Daniel M's avatar

Thanks, Ray, for the incredibly educational article. I also really enjoy Jimmy’s articles—for example, I gained a much deeper understanding of ratios like ROIC, ROIIC, and ROE from one of his pieces. His articles on FCF are excellent too, but it was phenomenal to read about these topics from a different perspective. I learned a lot from this as well. I think that’s why I love Substack so much. :)

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