Follow the Money

A Framework for Investors to Evaluate Management as Capital Allocators

Philip W. McCauley, III, CFA, and Brett C. Neubert, CFA

The authors would like to acknowledge Sandra L. Ballard, without whose research, analysis, and technical skills this paper would not have been possible.

Introduction

Free cash flow is an important valuation tool in the investment community and the preferred metric of many value investors. A common assertion among this group is that publicly traded shares represent ownership of a slice of a business and so intrinsic value of a stock can be derived by valuing the cash flows of the entire business and dividing by shares outstanding. We fundamentally agree with this view but have also come to recognize that ...

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