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Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks


Praise for Free Cash Flow

"This book provides the reader with the concepts, the context, and the tools necessary to invest successfully in a global market that has become increasingly challenging for all investors, both institutional and individual. I applaud the author's efforts and recommend this book to all investors seeking shareholder value creation."—From the Preface by William W. Priest, Chief Executive Officer, Epoch Investment Partners, coauthor of Free Cash Flow and Shareholder Yield: New Priorities for the Global Investor

"George Christy has it right—to value a business you must follow the cash. What else counts?"—Bruce Berkowitz, President, Fairholme Funds, Inc.

"Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stocks helps keep the investor focused on what truly matters to value creation—Free Cash Flow."—Charles W. Mulford, Invesco Chair and Professor of Accounting, College of Management, Georgia Institute of Technology, cofounder of Cash Flow Analytics, LLC

"GAAP earnings are more theology than science. They are a series of assumptions that lead us to what we 'believe' earnings to be. As George Christy thoroughly explains, Free Cash Flow definitively reflects the true value of a company. After more than a decade of roving market bubbles, it is refreshing to read this work of fundamental analysis pointing to successful investing. I read it as a refresher course to my CFA certification."—Boniface A. Zaino, CFA, Managing Director, Royce & Associates, LLC

George C. Christy, CFA, has more than thirty years' experience in the financial markets. He has served as corporate banker for Fortune 500 and middle market companies, as well as treasurer of a publicly owned telecommunications equipment manufacturer. Christy has a BA from Princeton University and an MBA from the University of Chicago, and holds the Chartered Financial Analyst (CFA) designation. He is a member of the Los Angeles Chapter of Financial Executives International, the CFA Institute, the CFA Society of Los Angeles, the Japan America Society, and the International House of Japan.


CHAPTER 1: Investing 101.


Free Cash Flow.

Risk and Return.

The Return Multiple.

Return and Price.



Debt versus Equity.

Private Company versus Public Company.

CHAPTER 2: The Accounting Fog Machine.

GAAP: Competing Theories, Matters of Opinion, Political Compromises.

GAAP: Accrual Abuse.

GAAP: Errors Bred by Complexity.


GAAP EPS: An Incomplete Definition of Financial Performance.

GAAP EPS: Investing in an Economic Vacuum.

EBITDA is Not a Cash Flow Metric.

The GAAP Cash Flow Statement.

Beware the Balance Sheet.


Fixed Assets and Depreciation.

Leverage and Debt Service.

Whose Return on Equity?

The Notes.

When Do Accruals Meet Cash Flows?

What is to be Done?

CHAPTER 3: Free Cash Flow.

Reconciliation of Net Income and Free Cash Flow.

Free Cash Flow versus Net Income.

A Universal Definition?

Academic Research and the Discounted Cash Flow Model.

Barron's Rankings.

Buy-Side Users.

Private Equity Firms.

Warren Who?

A Vast Media Conspiracy?

FASB Staff Findings.

FAS 95: A Cruel Rule.

EPS Misses: The Real Deal.

An Alternative to the Government Number.

CHAPTER 4: The Free Cash Flow Statement.

Building the Free Cash Flow Statement.

Four Key Questions.


Operating Cash Flow.

Ä Working Capital.


Capex: Magnitude and Risk.

Capex and Capital.

Capex Transfer.

Capex Visibility.

Capex and Investor Return.

Free Cash Flow.

Free Cash Flow Yield.

CHAPTER 5: Free Cash Flow Deployment.





Projecting Investor Return.

CHAPTER 6: The Free Cash Flow Worksheet.

Worksheet Features.

Entering Historical Data.

Adjustments to GAAP Cash Flow.

Operating Cash Flow.


From the Balance Sheet.

The Free Cash Flow Statement.

GAAP Data.


Per Share Data.

Incremental Data and Company's Reinvestment Return.

Cash Sources and Deployments.






Projecting Free Cash Flow.

Projecting Cash Sources.

Projecting Acquisitions.

Projecting Δ in Share Value Due to Δ in the Number of Shares.

Projecting Investor Return from Dividends.

Projecting Δ in Share Value Due To Δ in Debt.

Projecting Δ in Share Value from Operations.

GAAP Data, Percentages, and Per Share Data.

Incremental Data and Company's Reinvestment Return.

Investor Return Projection.

Return Multiple.

Adding Periods to the Worksheet.

Using the Worksheet.

CHAPTER 7: Six Companies.


Percentage Change in Revenues.

Operating Cash Flow Margin.

Capex as a Percentage of Revenues.

Free Cash Flow Margin.

Free Cash Flow Per Share.

The Government Number.

Net Nonworking Capital Items.


Panera Bread.


P. F. Chang's Bistro.

Cheesecake Factory.


Three Musketeers without New Unit Capex.

Whose Return on Equity?

Sell-Side Analysts.

Total Returns.

Take Your Pick.

CHAPTER 8: The CEO and Investor Return.

The CEO's Letter to Shareholders.

The Quarterly Earnings Conference Call.

The CEO's Incentive Compensation.

CHAPTER 9: Finding Great Stocks.

The Nine Steps.

Diversification for Individual Investors.

Equity Mutual Funds.

Free Cash Flow and Bonds.

Free Cash Flow and the Financial Crisis of 2008.

APPENDIX A: Equations.

APPENDIX B: McDonald's Income Statement.

APPENDIX C: McDonald's Balance Sheet.

APPENDIX D: McDonald's ROIIC and Weighting.

APPENDIX E: McDonald's ROIIC Calculations.

APPENDIX F: Recommended Reading.



About the Author.

About the Website.