The book was written by a former banker who focused on whether a company generated enough cash to repay its debt. I like that angle and combined with the book’s simple language it is the best book for analysing cash flows that I am aware of. The book could however be improved in a few places which is why I haven’t given it 5 stars. In particular I would have liked a deeper explanation and discussion of why the author has chosen that particular definition of Free Cash Flow as opposed to other definitions, e.g. why working capital changes are included since these may also be of a non-recurring nature. I would also have liked a deeper discussion on how to treat debt in the analysis, whether to deduct it in valuation or whether one should assume the same debt level could be sustained for eternity.

The book also includes Excel spreadsheets for calculating Free Cash Flow and these are made available for download on the internet. The book gives a long and detailed description on how to complete and interpret these spreadsheets. You will probably skip most of this description on a first reading and only use it for later reference, but it is very good to have when learning to use the techniques for computing Free Cash Flow, and more books in finance should have such detailed descriptions of their methods.

The book is recommended for people already experienced in analysing financial statements. While determined novices may also use this book for learning these things, I do recommend starting out with getting a proper understanding of financial statements first, for example by starting with the book Financial Statements by Thomas Ittelson.

Rating: 4 / 5

My problem with the book was its presentation. There is a long chapter in the middle of this fairly short book which ties it to his website. I found it hard to follow and tedious. A book should be stand alone and I did not like being directed to his Excel spreadsheets on his website. Teaching you how to design your own spreadsheets is fine but I did not think that the author did a good job teaching you how to do this through his book. Overall, great wisdom but needs improvement with writing and presentation.

Rating: 3 / 5

The simplistic analysis of capital expenditures also causes many problems that lead one to cast out too many good stocks. Take for example WMS, a maker of slot machines. By the author’s method, free cash flow is down 24% year over year. Why is the stock up about 40% over that span? A large chunk of WMS’s capex is the cost of machines that are leased by casinos rather than purchased. WMS gets more than $60 a day in revenue from each machine, on average.

How does one evaluate the ROI? A machine might cost WMS $5,000-$8,000 to make. A casino needs to keep the machine on its floor little more than three months for WMS to get paid back for its investment. And when the casino returns the game to WMS, the company can refurbish it cheaply and re-lease it, or sell it outright.

WMS has grown gross cash flow (the author’s version of operating cash flow) for four straight years, 26% CAGR, 250% increase. Over that span the stock little more than doubled. Perhaps it’s still inexpensive now, or maybe it was overvalued four years ago.

WMS will never be inexpensive on free cash flow until the company ceases growing leased machine placements, which of course would be a bad thing. In such a case the author’s method works in reverse, missing the growth story and finding a high ROI company only when its best days are behind it.
Rating: 2 / 5