Question

Using the two stocks you identified, determine the free cash flow from 2013 & 2014. What inference can you draw from the companies’ free cash flow? The two companies is Home Depot and Amazon.com

Answer 1

Free Cash flow (FCF) to the firm is mathematically calculated as:

FCF = Cash flow from operations (CFO) - Capital expenditure

Home Depot Inc

Home Depot Inc reported its financials as on Feb 2, 2014 and Feb 1, 2015. Hence, for the purpose of 2013 free cash flow, i have considered the financial statements as on Feb 2, 2014 and for 2014 free cash flow, i have considered the financial statements as on Feb 1, 2015.

FCF₂₀₁₃ = CFO₂₀₁₃ - Capital expenditure₂₀₁₃ = $ 7.628 bn - $ 1.389 bn = $ 6.239 bn

FCF₂₀₁₄ = CFO₂₀₁₄ - Capital expenditure₂₀₁₄ = $ 8.242 bn - $ 1.442 = $ 6.800 bn

Amazon

Amazon fiscal year ends on 31st December, so there is no fiscal - calendar period mismatch.

FCF₂₀₁₃ = CFO₂₀₁₃ - Capital expenditure₂₀₁₃ = $ 5.48 bn - $ 3.44 bn = $ 2.04 bn

FCF₂₀₁₄ = CFO₂₀₁₄ - Capital expenditure₂₀₁₄ = $ 6.84 bn - $ 4.89 = $ 1.95 bn

Inferences

Free cash flow is the cash flow available after the firm's reinvestment needs have been made. It's the free cash flow available for distribution between the lenders and equity holders.

1. Home Depot has relatively higher cash flow from operations but relatively lower capital expenditures. it has moved in mature and stable phase while Amazon is still in high reinvestment phase. It's need for capital is higher. A significant part of the cash flow from operations was reinvested back into the business, in case of Amazon.
2. Free cash flow for both the firms are positive, this implies their reliance on external funding is on decline.
3. Both the firms can deploy such a high and positive FCFF towards:
   • Accelerated debt repayment
   • Dividends
   • Share buyback
   • Acquisition opportunities