You made some relative statements on the SMR that I would like some further clarification on.
Two of them were:
"But you can't have too much free cash flow. The more the better."
AND
"That's a lot of cash for one quarter for a company that has a market cap of a little over $2 billion, don't you think?"
My response to that question was, "I have no idea".
When looking at a particular company's free cash flow, should we look at it as a percentage of their earnings, or market cap, or both? If so, what percentage guidelines to use? You gave some good guidelines for ROC and Earnings Yield.
This is an art, it’s not a science. If I had guidelines to give you, I would sure give them to you. I look at free cash flow on a relative basis.
For example, FTO is a $2 billion company with free cash flow of $120 million for one quarter. SLAB (I just happened to be looking at SLAB today) is also a $2 billion company (different industry). It had less than $15 million free cash flow for the same quarter.
And that, by the way, is the same way Greenblatt looks at ROC and earnings yield. He doesn’t give guidelines in his book. He makes comparisons.
I just thought it would be obvious that $120 million in FCF for three months would be a lot of cash for a company with a market cap of $2 billion. I guess I was wrong.
I’ve always told people that the best way to learn technical analysis is to look at a lot of charts every day. That’s also the best way to learn financial statements. Read a lot of them.
If it helps, some people like to compute a ratio called price to free cash flow. It’s the same as a price to earnings ratio, except you use free cash flow instead of earnings. But you still would have to make comparisons.
So that’s what I do. I look at ABC company and XYZ company. And if ABC has more free cash flow than XYZ, that’s a plus for me. I try to make it as cut and dry as I can, but there’s a limit to how much I can do that.