Ebitda CaseThe company I pick from S&P 500 is Google Inc., which is a multinational corporation specializing in internet-related service and products. Google has been estimated to be a rapidly growing global technology leader focused on improving the way people connect with information, and its trading stock price is remained really high and still on the rise.
The expected sales are given by Capital IQ from year 2014 to year 2018, and their values are listed below in the table. By calculating the average growth rate of sales over next five years, which is 12.8%, and have it compared with the one from the previous three years, which is 25.8%, it can be concluded that the projected sales value given by Capital IQ are reasonable. The average growth rate for the next five years represents a stable rate for a longer term, which should be lower than the short-term one when seeing the future performance of the company in a long-run view (Appendix A).
Table1. Expected Cash Flows (in millions)Sales68,17678,37788,61498,769109,330The estimated EBITDA to Sales ratio is gained by calculating the average value of EBITDA margins from year 2011 to year 2013, which is 33.3%. Because the sales margins are acquired by Capital IQ from the market data as reliable source, we can use the average of the previous three years’ EBITDA margins as a constant multiple to project the future five years’ EBITDA. By assuming a constant EBITDA/Sales ratio for the next five year, we can get the EBITDA value using this ratio and projected sales. The predicted EBITDA value are different from the values given by Capital IQ mainly because the future five years revenues are estimated with a comparative slower growth rate, resulting in lower EBITDA/Sales ratio and also lower EBITDA (Appendix A).
Table2. EBITDA (in millions)EBITDA22,70226,09929,50732,88936,405As given by EDGAR, the effective tax rates for the periods of year 2011 to 2013 from its 10-K form are 21%, 19.4%, and 15.7% respectively. So, I use the average value, which is 18.7% as the anticipated tax rate for the future calculation because Google is a mature and stable company that its tax rate will not fluctuate significantly on an annually basis. In addition, the depreciation and capital expenditure given by Capital IQ are reasonable because they use the average margin from the previous three years values to predict future. The change in net working capital from year 2014 to 2018 are also reasonable and in a decreasing trend due to a decrease in income tax rate. By applying those values in the table, we can get the anticipated free cash flows over the next five years for Google (Appendix B). The results
If net working capital changes from year 2014 to 2018, the change in net working capital from year 2014 to 2017 (the free Cash Flow (FOV) formula) becomes a 1.4% free Cash Flow in 2017. The net Working Capital cost (the capital cost) can be calculated as the capital needed/expected to generate growth in 2017. This free Cash Flow (FOV) calculation is based solely on earnings before interest, taxes, depreciation and amortization for the last three years. These estimates are a better approximation than the estimates of net working capital for 2015 and 2016 (which is an indication we know the company has a similar net working capital to the company in the previous year). We would be able to determine, based on this free Cash Flow (FOV), that they are in line with the estimated value to be generated by the Google operating business as in year 2014. The Free Cash Flow (FOV) results come in as an independent and not a combined return and not a return estimate for the company. These results can be very misleading (i.e., they are dependent upon a tax return), because as we already explained above, in the past the company did not pay any tax, and if the results become negative, we will have to recalibrate the Free Cash Flow calculations to reflect these results. The Free Cash Flow results are further based upon the current estimated cost basis of operating: net operating expenses, which include depreciation, amortization and interest related charges and the expenses of management including, but not limited to: depreciation of investments, net worth and assets (including earnings earned from foreign currency fluctuations and asset-to-income differences); depreciation of net investment capital; and other income (expense) (from operating activities), including taxes, depreciation, amortization and interest that are due primarily to changes in the market price and the impact of market activities. We estimate that these two free cash flows estimate that Google is making an expected free cash flow of $8 billion, based on the above Free Cash Flow results. We do so by subtracting the current operating costs based on the Company’s current estimated free cash flow in the previous year and the current estimated costs. This free Cash Flow (FOV) is based purely on the amount Google’s current and future net operating expenses (which includes depreciation, amortization or interest paid to management, but not including depreciation and amortization in net assets). We use this figure of $8 billion for the last three years as our free cash flows estimate. We use the estimated discounted cost basis of operating in computing the cost basis of this free cash flow (FOV) by using these operating conditions and the current planned business cycles in operating. If the current scheduled business cycles have a high cost base or a low expected cost basis (e.g., it is the long term goal to maintain earnings above the current assumed cost base), the expected free cash flow estimate is as follows: The base free cash flow is the amount Google is expected to make with respect to the planned business cycles. Once we have reached that limit, we use it as the amount of revenue that these business cycles could generate with a cost increase based on a discount we estimate is below what Google believes it would be in the future under normal operating conditions (or even the actual cost of production). The cost basis for our current plans is also higher than for