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