DCF for Negative FCF

Hi Preston/Stig,

Thank you for an excellent course, very valuable indeed.

Now I have a query regarding Discounted Cash Flow. I am analyzing a company which has Top and Bottom line growth between 80-100%. An excellent Tech company with zero debt and very high growth from last 8 years, year on year. However, there is negative free cash flow pretty much every year except current year. All the cash is being used in capital expenditure to create new tech assets.

Now my question is how do we value such companies since there is negative FCF. I have read somewhere that there is another method called Residual Income method, to value companies with negative FCF.

Please share your thoughts on this.



  • I tend to value based on revenues for companies like these so you could use P/S or EV/Sales. I also like to use Al Mayer's P/S rule of thumb which relates to the kind of net profit margin a company is generating.

    5% : P/S 1
    10 : P/S 2
    15% : P/S 3
    20% : P/S 4

    and so on.

    So if you have a young fast growing company that is achieving a 15% net profit margin paying 3X Annual revenues is reasonable, if it's trading at 6X revenues I'd pass on it.

    Hope this helps!


  • Maybe EPS growth can be used instead of FCF growth? I have seen gurufocus use EPS growth instead of FCF
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