Estimating free cash flows and valuing a growth company

Nancy L Beneda ()
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Nancy L Beneda: University of North Dakota, College of Business and Public Administration

Journal of Asset Management, 2003, vol. 4, issue 4, No 3, 247-257

Abstract: Abstract Financial analysts should be primarily concerned about the operating performance of a firm when considering whether to invest in a company. In light of the recent Enron bankruptcy, the largest in US history, financial managers are reviewing and evaluating valuation techniques and procedures. These techniques, used in conjunction with qualitative evaluation and judgment, may help financial managers to avoid some of the valuation mistakes which occurred in the Enron debacle. This paper sets out a simple, but detailed, step-by-step procedure for computing free cash flows and valuing a growth company. An illustration of the computation of free cash flows and corporate valuation, using Compustat financial statements, for Health Management Associates is used to illustrate the procedures. Health Management Associates was reported in the 12th August, 2002, issue of Fortune Magazine as one of the top 40 growth companies traded. Use of the techniques presented in this paper will bring to light the degree of success of the strategic direction and the ongoing performance of the managers of the company. The application presented would be especially useful to investors who hold growth stocks in their portfolios, equity research analysts, venture capitalists and managers of growth firms.

Keywords: bankruptcy; corporate valuation; Enron; dividend discount model; free cash flows; growth companies; operating performance; start-up companies (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1057/palgrave.jam.2240106

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