Value Company With Negative Free Cash Flows
How do you value a compnay with negative free cash flow for 2007? Do you look at an average of the last five years? I believe that you look at multiples, could somebody please confirm that.
Negative FCF Valuation
If you have a negative free cash flow value in a historical year - this is not necessarily relevant to the valuation moving forward. In this case you should focus on forward looking valuation methodologies both intrinsic valuations and comparable analysis based methods which we will discuss below. The same holds true for negative free cash flow in the projection window - however, if there is negative free cash flow through the majority of the projection window you will likely be unable to use a discounted cash flow analysis.
Intrinsic Valuation with Negative FCF
If you are doing a discounted cash flow analysis - you can proceed with the valuation as normal as long as the free cash flow is not negative in the terminal year and if the sum of the discounted cash flows in the projection window are not negative. Again - if the negative free cash flow value is in the historical period - it does not matter for the purposes of the valuation.
Read more about how to do a discounted cash flow analysis.
Comparable Analysis with Negative Free Cash Flow
If you are valuing a company with a metric like price to free cash flow and the past year of cash flow is negative - you should use the next year estimate for free cash flow to determine a share price. IE if it is 2017, and the last twelve months had negative cash flow, you should use the projected next twelve months cash flow to determine the share price (alternatively you could use the 2018 estimate).
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