Why Capital Allocation Matters

As we noted in our last commentary, the intrinsic value of any investment rests on the free cash flow the business can generate over its remaining life, discounted back to present value at an appropriate rate. Obviously, one cannot actually know the precise timing and magnitude of cash flows even for the next few years let alone the remaining life of a typical business. Once we begin to focus on free cash flow, it also becomes apparent that it is critically important to determine what a firm does with such cash flows.

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