How to forecast the Free Cash Flow?

liuxiaotiantt's picture
Rank: Monkey | 48

I am studying comparable analysis and need to forecast the FCF (= Cash from operating activities - CapEx) for the next two fiscal years. I have the FCF (LTM 10/31/2017) and the estimated CapExs for 2017E, 2018E and 2019E. I hope to know how I could get the Cash from Operating Activities for 2017E, 2018E and 2019E.

Or maybe I should find a FCF annual growth rate from somewhere?

Thank you!!

Comments (16)

Dec 14, 2017

Maybe forecast sales (taking into account seasonality and trend) then make the rest of the items % of sales? You should be able to fill out the rest of the statements using that then just calculate OCF as EBIT+Depr.-Taxes+/-ChangeWC (i think).

Dec 14, 2017

Hi! Thank you very much for your kind answer. I have the Forecasting Sales (for 2017, 2018 & 2019) and FCF/Sales % (for previous three years). Do you think I could get the Forecasting FCF using [Forecasting Sales x Average FCF/Sales % of Previous Years]?

Dec 15, 2017

Don't try to find a shortcut, trust me you're going to want to forecast as much of the 3-statements as possible then calculate FCF for each period. Then unlever your FCF and derive your EV from that. After that you can calculate your multiples to compare to whatever comps set you have.

Dec 30, 2017

Thank You and wish you a successful Year of 2018! :)

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Dec 15, 2017

I agree with @MarlboroJones, don't shortcut this.

If you have forecasted sales and trailing information it is pretty easy to get FCF. You will need to find your net income - forecast your COGS, operating costs, interest, and taxes to derive this number. Your cost assumptions should be relatively straightforward, look at the trends and apply assumptions for scales of economy to fixed cost. Then you will have to find the balance sheet items that go into your operating cash flow - i.e. change in net working capital. You should use trailing ratios on AR, AP, Inventory, ect. to find future line items. Take the difference (Increase in asset means reduction in cash, increase in liabilities means an increase in cash - and vice versa) to find what your change in net working capital is on the cash flow statement.

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Dec 30, 2017

Thank you and wish you a successful Year of 2018!

Best Response
Dec 30, 2017

Theoretically option 1 is done with option 2 as that gives you an idea of the terminal year growth rates and margins, but option 2 is more flexible especially if the firm had planned projects, cyclical, growing, or had a few years of change.

Generally people go with option 2 and may use aspects of option 1 for the terminal year if at all.

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Dec 30, 2017

SB'ed. I think you've covered this in whole, yes :). Generally, option 1 is a good back of the envelope that you can use in the absence of very granular information, but I've usually found a driver based bottoms up model to be the most intuitive (though a degree more time consuming to build). Having X correspond to [ ], Y to [ ], and Z to [ ], and then each of these to segment/product level growth, was always the ideal way of going about it for me.

Unfortunately, sometimes we aren't given the necessary level of detail, and have to make a high level approximation based on the historicals. (truth be told, I don't think there is a meaningful difference between the two methodologies at all, but you didn't hear it from me ;P)

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Dec 30, 2017

This is something you should rely on your group for; this is something that is highly specialized.

Dec 30, 2017

what?

Dec 30, 2017

If there's any pattern to the fluctuations, just run your DCF for a period that's divisible by that number of years.

EG if the company hits peaks and troughs over three years, run your DCF for 6. There's no magic to 5 years.

Dec 30, 2017

Depreciation grows with PPE. If you are increasing PPE due to building new facilities, I would expect a corresponding increase in depreciation. Perhaps use the average historical depreciation as a % of PPE and project that % forward based on where you see PPE going.

Cap-ex is probably not related to historic trends in this case, especially if they are starting a significant new project. Cap-ex expectations are usually disclosed by a company either in the most recent earnings release or most recent transcript. Management usually guides to the expected cap-ex number. The good news is, if you have your cap-ex number, you also have your increase in PPE.

Dec 30, 2017
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