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.
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Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces.
He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil's goal is to help you learn how to invest and achieve financial independence.
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