Monday, December 12, 2011

How do I project the cash flows for a company for the next 5 to 10 years?

I think I should be using pv=cf/(1+r)^n for the first five years, but where do I get cf (cash flow)? Do I look at the company's cash flow statement? And if so, what exactly on the cash flow statement do I use (Total Cash Flow From Operating Activities?) for cf?|||Now this is too big a question for Y!Answers but still it's good u did ask, buddy. This is the most subjective area for investment professionals. It's the kind of stuff that separates the men from the boys.


Let's assume that u want to value a company's stock.


First of all, u plan your work. Most common way to go around it is the top-down approach. It starts by analyzing the trends apparent in (1) the country/economy in which your company operates, (2) the company's industry/sector/market, and (3) the company's own numbers.


Second, u go through all the company's news and documents especially the forward-looking statements by the company's executives in MD%26amp;A. Assess every piece of information that could be relevant to the future estimates u r trying to builld. Legal issues can be very important here as well.


Finally, prepare an exhaustive list of missing items if any, and a questionaire for the company's executives if u have access. This is the part when some people get really agitated and defensive if u dig too deep so take care. The world might turn out to be filthier than u think.





Now u have a complete understanding of the company's prospects and it's time to pick your favorite model and apply your findings within it. Your model will choose a certain proxy for income (I prefer Free Cash Flow to Equity (FCFE) myself) and an appropriate discount rate to use with it. The economic rationale to this is that market value of a capital asset today is equal to present value of all its anticipated future benefits.





A different scope of work will call for a different methodology. Analysts don't go about valuations the same way they would about feasibility studies or capital budgets.., etc. Actually every model has a certain edge that makes it best for a certain use.





I could go on writing about it but like I said; this issue is not Q%26amp;A material. Apply a step-wise approach through the process and take your time. Strong understanding of economics and industry dynamics is key. It starts all stressful and exhausting. u begin to know why there isn't an investment banker on the planet working less than 10 hours a day. It gets better with practice and experience of course.





Good luck.|||Go to http://www.score.org/template_gallery.ht鈥?/a> and download the Excel template for estimating cash flow.|||cash flow is moving of money in and out on a specific project.


e.g. company buys hotal it iwill caulate it cash flow by income in and expence out y1 y2


rent earn 1000 500





water (100) 100


electricity (50) 50


fixing (200) 200


furniture 300


total 350 550


opening cash - -50


closing cash 650 650


total 650 600

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