Negative UFCF in dcf analysis
Hi, I'm trying to build a dcf model analysis. I got a company and this company considered a bluechip company in my country. The problem is when I calculating a Unlevered Free Cash Flow the calculation shows a negative value, and it is not in the quartal but also annually. The company has a huge negative number in changes in working capital since this company is a manufacture and need to restock their inventory. I watch another thread and shows that negative value should be included in the calculation. So can I used the negative number when all of it is negative to calculate dcf analysis?
Yes you use the negative number. DCFs don’t really work on companies burning cash unless you extend the timeline.
despite negative ufcf the company is profitable, the problem is the huge negative in changes in working capital. I read once that in dcf model you should use ufcf instead of fcf. Should I use fcf instead of ufcf or for better analysis should I use another valuation model?
ufcf is typically more appropriate as it treats various capital structures the same, giving a better intrinsic valuation for the business.
What is the main driver between the difference in the fcf and the ufcf in this case??
Very confused by your comments here. The company has positive FCF but negative unlevered? I don't think that is possible. It is possible for them to be profitable on the IS and losing money on a CF basis, but recognize that even though they posted a profit it wasn't real if the working capital changes caused CF to be negative. Additionally wouldn't you then expect them to work through that inventory build in subsequent periods and for CF to turn positive if that is the only reason it was negative?
It sounds from your comments almost as if you're trying to build a DCF off one period. You need to extend the first stage of the forecast period enough years into the future to the point where they are profitable and to the point that you cannot conceive of how their margins would change. I would assume that you don't expect them to lose money in perpetuity, why would that business even exist if it was so structurally flawed that it will never produce positive CF's over the course of its life? So I think you need to rethink some of your core assumptions here before trying to build out a model.
from my calculation the ufcf is negative for all of the quartal and yearly. Despite that fact the net change in cash has a positive value on the first quartal of this year and positive net change in cash in 2017 and 2016. What i'm confuse is the company for some period record a positive net change in cash but the ufcf is negative in all of it. If my ufcf calculation is right should I change another valuation model for this company? if it's wrong, which part of it is wrong?
My educated guess of what's going wrong here: you're doing a direct method cash flow calculation (add cash receipts, subtract cash payments), but still adding in the net change in working capital. This effectively double counts the change in NWC. You either do indirect method: NI + chg NWC + D/A; or you do direct: cash payments - cash receipts. You're blending both and getting screwy results.
Agreed with @Secyh62" above - your UCFC being lower than your FCF is always a red flag.
So a couple comments here:
EDIT to my original comment: Your CFO looks to be just a sum of the adjustments to NI that are typically made to arrive at CFO, where is your Net Income starting point? Additionally, if those cash flow statement adjustments are correct, your UFCF would be your NOPAT plus that number which should equal 2.6B?
But the more important comment is that you can't run a DCF off a 1 quarter forecast. A DCF is meant to be extended many periods into the future and is meant to have multiple stages. Most DCF's either have 2 stages or 3 stages (maybe more but I am only familiar with 2 and 3 stage versions). Review some reading on a two stage DCF and then extend your forecast period based on what you learn
the cash flow statement is for calculating a change in net income (profit or not in the period) and not the cash flow statement that shows the total of cash that company has.
for this question: Additionally, if those cash flow statement adjustments are correct, your UFCF would be your NOPAT plus that number which should equal 2.6B?
what do you mean by that number?
The way I'm not doing a projection is because I'm not quite sure with my ufcf calculation that's why I'm stop at the first quartal calculation of this year. I realize that I made a wrong title using a dcf analysis instead of just ufcf calculation or something.
You're looking at an international company so I don't know if that is the disconnect that we're having but assuming the financials are relatively similar: on a normal GAAP reporting company the starting point for CFO is net income. In your second screen shot you are showing the adjustments that are made to net income to arrive at CFO. Net income is the starting point though and you have nothing there and your CFO is just the sum of the cash adjustments. If I look at your starting NOPAT calculation it appears to be positive. The only real difference between FCF and UFCF is that FCF starts with net income and then makes cash adjustments and UFCF starts with NOPAT. So using your screens, 1,545,283 would be your starting point, then make your cash adjustments to that which appear to sum to 1,152,707, so that is where I assumed 2.6B to be your UFCF.
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