RE:A quick word on increasing free cash flow Thank you invest for those insights on free cash flow which is the ultimate measure of profitabiulity.
An analytical poster like Investor contributes much more to fair value estimation than qualitative postings ( but these are important too ) because such proferred statistics can be valued and replicated or even improved and will get others to do the same..
Our estimates are converging quickly and its probable that they are underestimates.
I estimated annual free cash flow of $3 million from a decomposition of balance sheet data and then a re-composition of those metrics adjusted for cost increases for the two new acquisitions.
You estimate free cash flow of $2.4 million, an eyeball view prorated upwards from Q3 free cash flows ( before tax ) of $517,000 including the two new acquisitions.
A more formal way is to adjust Q3 upwards for the 50 % increase in recurring sales ( 97 % ) attributable to the two new acquisitions.
The calculations are elementary ( $517,000 X 4 X 1.5 ) which equals $3.1 million or identical to mine calculated sonewhat differently.
Now, a very strong argument, ballasted by evidence, can be made that acquired subscribers add more free cash flow than core build-outs.
Free cash flow in 2012 was 9 % of gross.
In Q3/13, free cash flow was 21 % of gross, a doubling.
| BUT, COMM NETW, acquired in late Q1/13, produced net earnings of $214,000 on sales of $503,000.
This is a whopping after tax free cash flow rate of 42 %. |
Its obvious upon removing this free cash flow from the previous core that CN 's free cash flow rate was probably three times higher than core.
This seems obvious to me since, with subscribers and hardware buildout in place and with 97 % recurring, costs of this acquired subscrership is much lower, as only routine upgrades and minor maintenance is required ( ask yourself how many times a year that you see your cable guy ).
Using CN's estimated f/cf rate, the $5 million in annual recurring sales contributed by the two new acquiditions, could generate up to $2 million in extra free cash flow which flows directly thru ( less 25 % for taxes ) to net earnings.
That is, free cash flows could, in all probability, be much larger than $3 million and net earnings substantially higher than 4 cents per share.
It should also be noted that we have made no adjustments for gains in operating efficiency that normnally accrue from acquirsitions ( ie and eg, fixed costs become a much smaller part of overall sales ).
From these perspectives, 4 cents per share in net earnings on an annual basis, may be somewhat conservative.