Rule #1 Finance Blog

With Investor Phil Town

RULE #1 QUESTION OF THE WEEK: DOES BUYING BACK CO. STOCK LOWER THE FREE CASH GROWTH RATE?

This question comes from Gar in Portland, OR:

Q:  When looking at a company's free cash, the rate of growth up to the current year calculates to 24%. However in the current year they used nearly 1 million to buy back shares thus dropping the free cash growth ratio to 5%. Would it work to ignore the actuals and treat the share purchase as a positive to cash flow and maintaining the 24% ratio?

A: Absolutely.  Good call.  Never penalize the growth rate for using free cash for share buyback — unless the stock is overvalued.  Then it's a bad thing.