Valuing Companies with Negative Free Cash Flow

Summary

This discussion considers how to estimate intrinsic value when a company has reported negative free cash flow in every year examined. It suggests that a conventional discounted cash flow model may be difficult to apply in this situation and points to other valuation approaches, including comparisons with similar companies and dividend-based models when dividends are available.

It also describes looking at balance-sheet value: a company’s equity or net assets can provide a reference point, and dividing stockholders’ equity by shares outstanding gives a per-share figure. These suggestions are brief and do not provide a worked valuation or establish that asset value is a guaranteed floor. Peer comparisons can be unreliable, and dividend models require relevant distributions. The discussion does not explain how to forecast a transition to positive cash flow or adjust for asset quality, liabilities, or growth, so these alternatives are starting points rather than a full valuation framework.

Key ideas

• Persistent negative free cash flow makes a standard DCF valuation difficult to interpret.
• Peer-company comparisons offer an alternative, but their reliability is limited.
• Dividend-based valuation may be relevant when the company pays dividends.
• Balance-sheet equity can be used to estimate an equity value per share.

Tags

# Discounted free cash flow valuation


# Discounted free cash flow valuation












I started valuating company based on their free cash flow by using DCF valuation.But for some companies i came across negative free cash flow for all years. How can we evaluate company with negative cash flow using DCF valuation? and if not then what is another method for valuating such companies? (here valuation mean to calculate intrinsic value )

## Answer by Adrian Lawrence (score 2)

https://quant.stackexchange.com/a/42557

There are alternative approaches, for example a company can have a significant balance sheet but still be making a loss, in that instance it should be worth at least the net balance sheet value as by disposing of all assets.

## Answer by Thijssie3032 (score 0)

https://quant.stackexchange.com/a/76485

You can calculate companies in many different ways. In your particular situation I assume you've picked a growth stock. You can use similar competitors to value the company however it isn't reliable, therefore the payout model is good or discounted dividend model(incase of dividend).

You can also just calculate the stockholder's equity and divide it by the outstanding shares.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.