The Daily Technical #29: What type of material is found in an M&A pitchbook?

Good morning. Welcome to the 29th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
What does free cash flow (FCF) represent?

Free cash flow (FCF) represents a company's discretionary cash flow, meaning the cash flow remaining after accounting for the recurring expenditures to continue operating.

The simplest calculation of FCF is:

Free Cash Flow (FCF) = Cash from Operations – Capex

The cash from investing section, other than capex, and the financing section are excluded because these activities are optional and discretionary decisions up to management.

Common Mistakes

1. Confusing FCF with Net Income. Emphasize that FCF is about actual cash flow, while net income includes non-cash expenses such as depreciation. Always differentiate between cash metrics and accounting profits.

2. Forgetting to deduct Capex. This presents an inflated cash flow figure. Reinforce the importance of Capex as it reflects necessary investments back into the business, ensuring accurate FCF calculations.

3. Treating all cash flow components equally. FCF specifically highlights discretionary cash, excluding financing and optional investment activities.

Key Takeaways / TLDR

• FCF is the cash left after operational expenses and Capex. FCF is essential for discretionary financial decisions.

• Don't mix FCF with net income; remember, FCF focuses on cash, while net income includes accounting figures.

• Always deduct Capex from Cash from Operations to accurately reflect FCF.

TODAY’S QUESTION
What type of material is found in an M&A pitchbook?

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