SBC continues to be one of the most contentious points of conversation amongst the investment community - I don't see that changing. Something I've found helpful is to always approach evaluating companies both on a firm-level and equity-level. As far as I can tell, ensuring normalized numerators and denominators (FCFF/EV vs FCFE/MC, etc) and mapping out funding mechanics along with continued operations is the only way to tell what's what. Too often equity investors forget where they sit in the capital stack.
Thank you, very good article. Re Wickes adjustments, I get how the 5m was calculated but to go back to pre-IFRS 16 and adding back lease costs as operating expenses, should you not adjust for depreciation on right-of-use asset and interest on lease liabilities? Also, the resulting FCF yield is not really on unlevered basis because interest is factored in the FCF, so really should one not look at FCF to equity/ market cap in this case? Cause that's what Cap IQ, TRE and other vendors seem to be providing and I think that's what also research analysts do.
Pre-IFRS 16 you would have the lease as an operating expense, not depreciation, so getting the FCF from the Net Income will already include the leases and the interest, am I missing anything?
Re. the FCF not being unlevered, you are right. FCFE/MC would be more correct.
Thanks- great article. One thing on the Wickes example: where did the 71.6m that was subtracted from the 85.3m come from? The payment for lease liabilities is 82.4m, so I get an even lower FCF than your calculation.
SBC continues to be one of the most contentious points of conversation amongst the investment community - I don't see that changing. Something I've found helpful is to always approach evaluating companies both on a firm-level and equity-level. As far as I can tell, ensuring normalized numerators and denominators (FCFF/EV vs FCFE/MC, etc) and mapping out funding mechanics along with continued operations is the only way to tell what's what. Too often equity investors forget where they sit in the capital stack.
complementary my SBC take where also Damodaran replied: treated as cash or not, value of the cash when not counted as cash (optionality & solvability value) ;) https://twitter.com/Maverick_Equity/status/1585991105942032384
Great article, thank you
Thank you, very good article. Re Wickes adjustments, I get how the 5m was calculated but to go back to pre-IFRS 16 and adding back lease costs as operating expenses, should you not adjust for depreciation on right-of-use asset and interest on lease liabilities? Also, the resulting FCF yield is not really on unlevered basis because interest is factored in the FCF, so really should one not look at FCF to equity/ market cap in this case? Cause that's what Cap IQ, TRE and other vendors seem to be providing and I think that's what also research analysts do.
Pre-IFRS 16 you would have the lease as an operating expense, not depreciation, so getting the FCF from the Net Income will already include the leases and the interest, am I missing anything?
Re. the FCF not being unlevered, you are right. FCFE/MC would be more correct.
👉 The greatest trick Silicon Valley ever pulled was convincing everyone SBC (Stock Based Compensation) didn’t exist ... ;)
👉 SBC is not bad per se, forgetting or ignoring it is , especially when high ... otherwise SBC bring many benefits ;)
https://twitter.com/Maverick_Equity/status/1597591242854256642
Great take ... thank you!
👉 complementary my SBC take where also Damodaran replied: treated as cash or not, value of the cash when not counted as cash (optionality & solvability value) ... https://twitter.com/Maverick_Equity/status/1585991105942032384
Thanks- great article. One thing on the Wickes example: where did the 71.6m that was subtracted from the 85.3m come from? The payment for lease liabilities is 82.4m, so I get an even lower FCF than your calculation.
Well spotted ;) My mistake! I deducted the leases from 2021. Updated :)