Enterprise Value to FCFF (EV/FCFF)
Free Cash Flow to The Firm (FCFF)
McKesson Corp., FCFF calculation
US$ in millions
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
Between March 31, 2011, and March 31, 2016, a general upward trajectory is observed in both net cash provided by operating activities and free cash flow to the firm (FCFF), characterized by periods of growth interrupted by intermittent fluctuations.
- Net Cash Provided by Operating Activities
- Operating cash flows increased from 2,338 million US$ in 2011 to 3,672 million US$ in 2016. While the overall trend is positive, a temporary contraction occurred in 2013, with values decreasing to 2,483 million US$ from the previous year's 2,950 million US$. Recovery followed in 2014, with cash flows reaching 3,136 million US$ and remaining relatively stable through 2015 before peaking in 2016.
- Free Cash Flow to the Firm (FCFF)
- FCFF mirrored the movements of operating cash flows, rising from 2,119 million US$ in 2011 to 3,238 million US$ in 2016. A decline was noted in 2013, where FCFF dropped to 2,221 million US$, and a marginal decrease was observed in 2015 to 2,816 million US$. Despite these variances, the FCFF exhibited a compounded growth over the five-year period.
- Analysis of Capital Investment Trends
- The variance between net cash provided by operating activities and FCFF indicates the level of capital expenditures. This gap widened over the analyzed period, starting at 219 million US$ in 2011 and expanding to 434 million US$ by 2016. This widening trend suggests a progressive increase in capital reinvestment relative to the total cash generated from operations.
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Interest Paid, Net of Tax
McKesson Corp., interest paid, net of tax calculation
US$ in millions
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
1 2016 Calculation
EITR = 100 × Income tax expense ÷ EBT
= 100 × 908 ÷ 3,250 = 27.94%
2 2016 Calculation
Cash paid for interest, tax = Cash paid for interest × EITR
= 337 × 27.94% = 94
Analysis of the fiscal periods from 2011 to 2016 reveals a period of relative stability in net interest expenditures followed by a substantial increase in the final two years. While the effective income tax rate exhibited volatility, the net cash outflow for interest payments experienced a sharp upward shift starting in 2015.
- Net Cash Interest Expenditures
- From 2011 to 2014, cash paid for interest, net of tax, remained relatively stable, fluctuating between a low of 144 million USD in 2013 and a high of 169 million USD in 2011. A significant escalation occurred in 2015, where expenditures rose to 249 million USD, representing a 50.9% increase over the previous year. This elevated level of spending persisted into 2016 with a slight moderation to 243 million USD.
- Effective Income Tax Rate (EITR) Trends
- The effective income tax rate demonstrated non-linear movement throughout the analyzed period. The rate decreased from 30.89% in 2011 to 26.89% in 2012, before trending upward to a peak of 35.40% in 2014. In the subsequent two years, the rate declined steadily, reaching 27.94% by March 31, 2016.
- Relationship Between Tax Rates and Interest Outflows
- The surge in net interest payments in 2015 occurred alongside a reduction in the effective income tax rate from 35.40% to 30.67%. Because these interest payments are reported net of tax, the decrease in the EITR reduced the value of the tax shield on interest expenses. This reduction in tax relief, coupled with an increase in gross interest obligations, contributed to the marked increase in net cash outflows during the 2015 and 2016 fiscal years.
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Enterprise Value to FCFF Ratio, Current
McKesson Corp., current EV/FCFF calculation, comparison to benchmarks
| Selected Financial Data (US$ in millions) | |
| Enterprise value (EV) | 40,477) |
| Free cash flow to the firm (FCFF) | 3,238) |
| Valuation Ratio | |
| EV/FCFF | 12.50 |
| Benchmarks | |
| EV/FCFF, Competitors1 | |
| Abbott Laboratories | 25.75 |
| Elevance Health Inc. | 20.49 |
| Intuitive Surgical Inc. | 62.87 |
| Medtronic PLC | 25.42 |
| UnitedHealth Group Inc. | 20.98 |
Based on: 10-K (reporting date: 2016-03-31).
1 Click competitor name to see calculations.
If the company EV/FCFF is lower then the EV/FCFF of benchmark then company is relatively undervalued.
Otherwise, if the company EV/FCFF is higher then the EV/FCFF of benchmark then company is relatively overvalued.
Enterprise Value to FCFF Ratio, Historical
McKesson Corp., historical EV/FCFF calculation, comparison to benchmarks
| Mar 31, 2016 | Mar 31, 2015 | Mar 31, 2014 | Mar 31, 2013 | Mar 31, 2012 | Mar 31, 2011 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (US$ in millions) | |||||||
| Enterprise value (EV)1 | 43,051) | 57,740) | 49,411) | 27,034) | 22,057) | 21,278) | |
| Free cash flow to the firm (FCFF)2 | 3,238) | 2,816) | 2,882) | 2,221) | 2,714) | 2,119) | |
| Valuation Ratio | |||||||
| EV/FCFF3 | 13.30 | 20.51 | 17.15 | 12.17 | 8.13 | 10.04 | |
| Benchmarks | |||||||
| EV/FCFF, Competitors4 | |||||||
| Abbott Laboratories | — | — | — | — | — | — | |
| Elevance Health Inc. | — | — | — | — | — | — | |
| Intuitive Surgical Inc. | — | — | — | — | — | — | |
| Medtronic PLC | — | — | — | — | — | — | |
| UnitedHealth Group Inc. | — | — | — | — | — | — | |
Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).
3 2016 Calculation
EV/FCFF = EV ÷ FCFF
= 43,051 ÷ 3,238 = 13.30
4 Click competitor name to see calculations.
The financial trajectory from 2011 to 2016 is characterized by a significant expansion and subsequent contraction of the valuation multiple. While the company maintained a consistent ability to generate free cash flow to the firm, the market valuation of the enterprise shifted dramatically, resulting in a ratio that peaked in 2015 before reverting toward historical norms.
- Enterprise Value Dynamics
- Enterprise value exhibited a marked upward trend between 2011 and 2015, rising from US$ 21,278 million to a peak of US$ 57,740 million. The most aggressive growth occurred between 2013 and 2014, where the value nearly doubled. This trend reversed in 2016, with enterprise value declining to US$ 43,051 million.
- Free Cash Flow to the Firm (FCFF) Stability
- FCFF demonstrated steady growth with minor fluctuations, increasing from US$ 2,119 million in 2011 to US$ 3,238 million in 2016. The relative stability of these cash flows highlights that the volatility observed in the valuation ratio was primarily driven by changes in enterprise value rather than operational cash flow instability.
- EV/FCFF Ratio Analysis
- The EV/FCFF ratio reached its lowest point in 2012 at 8.13 and its highest point in 2015 at 20.51. The sharp increase between 2012 and 2015 indicates a period of significant valuation premium expansion. However, by March 31, 2016, the ratio corrected to 13.30, a movement driven by the simultaneous decrease in enterprise value and the achievement of a period-high in free cash flow.
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