Course 307: Cash Return
Watch the Cash Flow
In this course
1 Introduction
2 Watch the Cash Flow
3 Enterprise Value

Cash return consists of two parts: The free cash flow a company has generated, divided by the value of the entire company with debt taken into account. Cash return = free cash flow / ( market cap + debt ) From a shareholder's perspective, the higher the cash return, the better you feel, because a high cash return means a company is generating lots of free cash flow for each dollar you have invested in the company. If a company has a cash-on-cash return of 10%, for example, that means that somebody buying the whole company would be getting an investment that generates 10 cents in free cash flow for each dollar invested. Cash-on-cash return is helpful because it's easy to compare investments. A 30-year U.S. Treasury bond yielded about 6% at the end of 1999, while Coca-Cola KO, for example, yielded about 3.5% in cash return. In this sense, cash-on-cash return is similar to such valuation measures as dividend yield (dividend per share divided by the stock price) and earnings yield (earnings per share divided by the stock price). But cash return is a purer measure because it's based on the raw operating cash--not on earnings after taxes have been paid or what the company elects to pay out to shareholders. To figure the free cash flow part of the equation, start with EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. It tracks how money moves in and out of a company's checkbook in real time, independently from the accounting rules that color reported earnings. From EBITDA, subtract capital spending, or money the company has invested in maintaining the growth of its business. The result is the cash left over for benefiting shareholders or improving the business. (Good news: Free cash flow is calculated for you on a stock's Quicktake Report.)

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