simoan wrote:Yes, the big issue is that cashflow of the big oil cos has been artificially boosted by asset sales for several years, so the true organic FCF is much worse once you subtract money raised from those sales. There's only so long a company can pay a high dividend when it is only supported by selling assets whilst the debt continues increasing. What a dreadful investment any such company would make. The fall in the oil price was merely the straw that broke the camels back. Much better to hold some better quality small caps with dividends that are covered by genuinely organic FCF.
All the best, Si
This is one problem with FCF - what really is the relevant cash flow to equity? and associated with that is the difficulty of finding it.
Although, on the face of it, it ought to easy to calculate, I've always found there are difficulties - one example would be distinguishing between capex for invesment and that for maintenance. It is not always obvious from the accounts unless you can see through smoke.
The other problem is "for how long is a negative free cash flow sustainable?" I've known cases in which the FCFE has recovered very well after a period of several years negative: in short, how do we know it's time to throw in the towel? In seems to me that this is more a judgement call rather than an exact science.
One might list a third problem that the published results are always historic so you get the nail in the coffin after the burial - the mortal wound is sometimes indicated by the share price chart long before the funeral service is printed.
Arb.