Consistent Valuation Cash Flow

Abstract

This paper seeks to draw attention to a flaw in the firm’s Free Cash Flow model and related statement widely accepted in Corporate Finance. We argue that the common offset of any Current Liabilities against Current Assets distorts the FCF size, composition, and volatility, thereby misstating the firm or project size, debt and assets composition, financial leverage, risk profile, and estimated value. We demonstrate empirically that the offset opens opportunities to manipulate the FCF by systematically overstating its size and understating its volatility. We propose to avoid any offset and rename the standardized statement "Valuation Cash Flow" (VCF).

Keywords: Financial Reporting, Free Cash Flow, Net Working Capital, Cost of Capital, Corporate Valuation, Project Valuation

JEL Classification: G30, G31, G32, G35, G38, H32, K22, L21, M14, M40, M41