FCF Yield in Context (Malaysian Market)

 

FCF Yield in Context

Comparison with Malaysian Market:

FCF Yield	Interpretation
< 2%	Low/Expensive
2-4%	Average
4-6%	Attractive
> 6%	Very attractive

This is a solid, time-tested value investing checklist suitable for long-term investors seeking to build wealth steadily while avoiding big mistakes.

 

This chart outlines Terry Smith's investing philosophy, as summarized by Brian Feroldi. Smith is a well-known value-oriented fund manager (Fundsmith), and his principles emphasize quality, patience, and discipline. Below is a breakdown and analysis of each section:

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1. The Rule of 3

• Buy Good Companies – Focus on quality businesses with durable competitive advantages.

• Don’t Overpay – Even great companies can be bad investments if bought at too high a price.

• Do Nothing – Avoid overtrading; let compounding work over time.

Comment:
This is a distilled version of Warren Buffett’s philosophy: buy wonderful businesses at fair prices and hold them. “Do nothing” is especially important—many investors hurt returns by over-trading.

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2. Disqualifying Features

• Start by eliminating bad companies rather than searching for good ones.

• Reduces the risk of catastrophic losses.

Comment:
This is a practical risk-management tool. By filtering out companies with poor economics, high debt, or dubious governance first, you save time and avoid “value traps.”

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3. High Returns on Capital

• ROIC (Return on Invested Capital) is a key metric for quality.

• Formula:

  $$ROIC=\frac{\text{Net Operating Profit After Tax}}{\text{Invested Capital}}$$

Comment:
ROIC measures how efficiently a company uses its capital. Consistently high ROIC often indicates a moat and competent management. Terry Smith heavily emphasizes this in his stock selection.

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4. Look for High FCF Yields

• Free Cash Flow Yield compares FCF to the company’s market value.

• Formula:

  $$\text{FCF Yield}=\frac{\text{Free Cash Flow}}{\text{Market Value of the Company}}$$

• Compare to “3% over expected inflation” as a hurdle rate.

Comment:
FCF is harder to manipulate than earnings. A high FCF yield can signal undervaluation, but it must be considered alongside business quality—a declining business may have a high but unsustainable yield.

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5. Create a Watchlist

• Track companies that are good but not cheap enough.

• Use price targets to wait for the right entry point.

Comment:
This encourages patience and preparedness. Many investors miss opportunities because they don’t track companies systematically over time.

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6. Exploit Advantages of Being an Individual Investor

• Play the long game – no quarterly performance pressure.

• Buy unloved stocks or industries – contrarian opportunities.

• Invest anti-cyclically – go against market sentiment.

Comment:
This section is crucial. Individual investors can be more flexible and patient than institutions. They can exploit market inefficiencies in neglected areas without size constraints.

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Overall Commentary:

Strengths:

• The framework is simple, disciplined, and focused on quality and value.

• Emphasizes psychological and behavioral edges (patience, contrarianism).

• Uses few but powerful metrics (ROIC, FCF yield).

Potential Limitations:

• Requires deep business analysis and patience—not suitable for short-term traders.

• “Don’t overpay” is subjective; determining intrinsic value is challenging.

• Anti-cyclical investing demands strong conviction and can involve long periods of underperformance.

Verdict:
This is a solid, time-tested value investing checklist suitable for long-term investors seeking to build wealth steadily while avoiding big mistakes. It aligns closely with the philosophies of Buffett, Munger, and other quality-focused investors. The emphasis on eliminating bad ideas and waiting for the right pitch is especially valuable in today’s noisy markets.

The number the directors don't want you to find

FCF (Free Cash Flow)

You can use this FCF in the following manners, by comparing it with the EPS, DPS and Market Price per share:

1.  Compare FCF/share with EPS
e.g.  FCF/share divided by EPS = 80%.

2.  Divide FCF/share by the DPS (Dividend per share)
e.g.  FCF/share divided by DPS = 1.6x
This looks at the ability of the company to distribute dividends by looking at its free cash flow.

3.  FCF yield.
e.g.  FCF/share divided by Market share price/share = 5.3%.
Where the FCF yield is high, the investors should be attracted to the stock.

Free Cash Flow Return on Invested Capital

Free Cash Flow Analysis of NetFlix 

Mar 10, 2010

The following is a free cash flow analysis of NetFlix’s(NFLX) using FROIC and Price to Free Cash Flow.

FROIC for those who don’t know is = Free Cash Flow Return on Invested Capital.

Over the years I have tested out various ratios and have found very few that can compete with FROIC, in getting down to the real cash that a company is generating on Main Street .

Basically FROIC tells the investor how much free cash flow is actually generated as a percentage of the total capital that the company employs. To put it more simply, “How much free cash flow is generated for every $1 of capital that a company employs”

How does one calculate FROIC?

FROIC = Free Cash Flow/Total Capital

The way to determine Free Cash Flow is by taking a company's “Cash from Operations” and subtracting its “Capital expenditures” from it.

So in Netflix’s case its 2009 “Cash from Operations” was $325.1 million while its capital expenditures were only $45.9 million. Thus when we subtract $45.1 from $325.1 we get $280 million in free cash flow. We next take the company's $280 in free cash flow and divide it by its 58.416 million diluted shares outstanding and we get $4.79 a share in free cash flow.

If we then divide that number into the closing price of March 9, 2010 of $69.94, ($69.94/$4.79) we get a price to free cash flow of 14.6.

A price to free cash flow result of 14.6 is very attractive and I proved that in doing a backtest on price to free cash flow in the investment process”, using the DJIA 30 stocks from 1950-2007, and found that by only buying stocks that were selling for 15 times their price to free cash flow or less one would have substantially beat the DJIA 30 by a very large margin compared to buying the entire Index.

Now that we have seen what the free cash flow is for Netflix, let us now go and determine what its total capital employed is.

Basically Total Capital = Long Term Debt + Shareholders Equity

Taking just basic Total Capital is too easy in my view and I prefer is make it a little more difficult for a company to pass this test and add “other long term debt” to the equation. So for NetFlix we have the following for the year 2009.

Long Term Debt = $200 million

Other Long Term Debt = $54.2 million

Shareholders Equity = $199 million

When you add all those together you get $453.20 million for total capital employed.

Having done that we can now calculate FROIC as $280/$453.2 million or 61.78%.

What does this 61.78% mean?

For every $1 of total capital employed, NetFlix generates 62 cents in free cash flow.

I welcome everyone to go and try out FROIC on your own. In the end you will find that there are very few companies whose stock price trades for less than 15 times their free cash flow and generates 61.785 cents in free cash flow for every dollar of capital employed.


http://seekingalpha.com/instablog/498843-peter-mycroft-psaras/58154-free-cash-flow-analysis-of-netflix

POS Malaysia generates strong Free Cash Flow.

Have taken a brief look at POS.

1.  Cash rich company.  Cash RM 398.033 m, little debt.

2.  Net CFO is strong .. RM 198.451m

3.  Its FCF is strong ... net CFO 198.451 - capex 64.898 = RM 133.553m

4.  Market cap = RM 1670.2 m @ share price of RM 3.11 each.

5.  FCF/Market cap = 8% (very good).

6.  Dividend paid 50.346 m  DY = 50.346/1670.2 = 3%


It is no wonder that so many suitors are lining to acquire this stock from Khazanah.

Latest valuation based on closing price of 7.4.2011

Outstanding shares of POS = 537.03 million.

At the closing price of  MR 3.74 per share on 7.4.2011, its market cap = MR 2,008.5 million.

The FCF generated by POS in the last FY was MR 133.553 million.

Its FCF/Market Cap on 7.4.2011 = 6.65%.

Its Market Cap/FCF = 15 x

The successful company that acquire POS would have bought a company that is generating good net CFO and strong FCF.  

It is on the basis of this FCF that makes the valuation of POS seems reasonable for the moment.

Short cuts for finding value

Companies and shares are worth the present value of the future cash they can generate for their owners.  This is a rather simple statement, and yet in practice, valuing companies is not so straightforward.

As the famous economist John Maynard Keynes put it, it's better to be vaguely right than precisely wrong, and the better bet is to stick to a few simple valuation tools.  Here are some ways to value companies or shares:

1.  Discount cash flow method.

2.  Asset-based valuation tools.

• Price/Book Value
• Graham's Net Current Asset approach

3.  Earnings-based valuation tools.

• PE ratio

4.  Cash flow-based valuation tools

• DY
• FCF Yield

These different valuation tools each have their own strengths and weaknesses.

• The price-to-book ratio tends to work best with low-quality businesses on steep discounts.  
• The PER tends to work best with high-quality growth companies.  
• The dividend yield and free cash flow yield tend to be suited to mature businesses generating steady returns.

But in every case, you'll probably get closest to the truth by looking at all the different measures.

Also, only invest in good quality businesses.

Free Cash Flow Yield trumps Dividends as a driver of returns

The chart below was adapted from research conducted by Empirical Research Partners – it depicts relative returns for U.S. large cap stocks sorted by dividend growth, share repurchases, and price/free cash flow over the 35-year period from 1970-2005.

You will notice the following:

• Strategies focused only on dividend growth have only modestly outperformed the S&P 500 Index.
• Companies that pay no dividends at all have the worst return records.
• Strategies focused on price/free cash flow were the most effective at outperforming the S&P 500 Index.

Even in today’s severely compromised market environment, companies are fiercely protective of their free cash flow. Despite the downturn, free cash flow has held up remarkably well due to a couple of factors: a low capital expenditure base and aggressive management of working capital.

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