where to from here, page-73

MJS, simply looking at a cash accretive business and saying you would buy it at a 10% FCF yield (at the right price) isn't really addressing the questions I am trying to ask. I am trying to get at *historical* *accumulated* cash accretion using several years of the cash flow.

And, further, I am not trying to view this subjectively, but would like to arrive at a place where I can mathematically calculate a compound rate of return on the cash accretion of the business over time.

I want to get to a place where I can answer questions like "Over X years, what is the compound rate of return of my original investment, using the accumulated cash accretion of business to measure my returns."

Let's say that the company does not trade on any public market. Instead, I buy the entire company outright. I pay $10 year one to buy the two companies I originally described. The price I pay at sale in X years is a separate discussion, for a different thread. This thread is about what are the numbers I put into each year's cash accretion before I sell.

Company 1 for 10 years has $10 OCF and $1 Maintenance Capex, giving us free cash flow of $9. Over 10 years of identical behavior I get $90 of FCF. One could calculate a compound rate of return with initial investment date and amount, and subsequent $9 FCF "events" at fiscal year end date for 10 years.

Company 2 for 10 years has $10 OCF and $1 Maintenance Capex, but then spends $9 in growth Capex. So effectively the shareholder for this case has 10 years of ZERO cash accretion each year. Surely the compound rate of return for such a company is absymal.

To be clear, I am accepting Camden's appeal to center analysis on the cash flow statement. But I am trying to go one step further than he has gone so far, and to find a way to use the cash flow statement to understand historical accumulated cash returns to the investor. If the cash flow is a good tool for understanding efficiency and one-year "yield" calculations, then I think it could also be a good tool for understanding compound rates of return over time.

Where I am thrown off here is that I am not clear on how much of the cash flow statement I need to include to understand if cash really accreted to the shareholder in a given year. I believe you have to look at growth capex and acquisitions, because that is not cash that is for the shareholder, except insofar as it increases future cash flows. Further, I believe you have to consider net capital raisings. If the company is raising equity from shareholders, that certainly affects my compound rate of return.

Putting this all together into a single calculation that I can then use to construct a compound rate of return against my original investment would be an enormously useful thing. It is *that* calculation that might replace a return on equity calculation, except using real cash flows instead of depending on income statement and balance sheet, the two statement types that can be most easily falsified or distorted.