A research analyst I know posted a brief article about Twitter’s TWTR amazing ability to generate cash. I’ve been struggling with reprogramming Framework’s BSM Cone application after the data source we were using was decommissioned, and thought I could clear my mind by looking through Twitter’s financial statements for myself.
When I did, I realized that there was a great teachable moment regarding the difference between “Free Cash Flow” — the measure to which most analysts pay attention, and “Free Cash Flow to Owners” — the measure that we use to assess the value of a firm.
Anyone who has gone through a business school finance class knows that the most common definition of “Free Cash Flow” — that is cash that is available to owners or is free to be distributed to them — is Cash from Operations less expenditures on Property, Plant and Equipment (PP&E).
On this basis, Twitter looks great.
Figure 1. Source: Company Statements, Framework Investing Analysis
In column D, you can see that, during the most recent fiscal year, Twitter generated $831 million in Cash from Operations and spent $347 million on PP&E — what most people call “Capex.”
This implies a Free Cash Flow of $484 million, which is exactly one-fifth of the revenues generated during the year. This truly is excellent, and if that cash were truly free to the owners, it would be a very good thing.
However, analyzing a company’s investment spending by looking only at moneys expended on PP&E is far too restrictive. A company can and does invest in direct and indirect ways, and each of these items must be considered as well if you are serious about understanding how much wealth a company creates for its owners.
A few of the ways a company can directly invest is by buying other companies, by spending on software for its own use to make its own internal processes more efficient, by loaning money to joint ventures, and the like.
In Twitter’s case, it is most active in investments made in other companies.
Figure 2. Source: Company Announcements, Framework Investing Analysis
In column C, we can see that Twitter spent $82 million in investments into private companies (row 9) and another $85 million acquiring companies outright (row 10). The sum of these two rows — $167 million — is over three-fourths the amount Twitter spent on spending for new PP&E.
Row 11 represents “Capital Lease Obligations.” In our discussions lately related to REITs, you have learned all about capital leases, which are formed when a company sells a location to a REIT, then turns around and leases the location from the REIT. The property is not technically an asset on the books of the company that is using it, but economically, the company must have that property in order to operate.
In essence, Twitter spent $219 million on owned assets in 2016 (cell C5) and nearly half again on leased assets during that year (cell C11), for a total expenditure of $320 million.
You can see that by deducting these direct and very real costs from FCF that the actual cash that is free to be distributed to owners falls precipitously. The FCF margin in 2015 of 10% becomes an adjusted-FCF margin of only 3% after the additional expenditures are factored in.
However, there is also another, indirect way that companies “invest” in their businesses: by treating their own shares like currency and issuing them as a form of compensation for employees or as the coin used to acquire a company.
Even though there is no way to directly measure the costs, the costs of share issuance are very real to current owners. The more stock is issued, the more dilute the current owners’ ownership stake becomes. We have a video that explains this dynamic, so please watch it if you are not convinced.
The amount of value Twitter is giving away as it gifts shares to employees and acquisition targets is truly phenomenal.
Figure 3. Source: Company Statements, Framework Investing Analysis
Over the last three years, on average the firm has doled out around $900 million per year worth of its own shares (row 18). When we deduct this indirect cost from the direct investments, we get the measure that we see as a far superior measure of the value accessible to owners: Free Cash Flow to Owners (FCFO).
Looking at the FCFO margin on row 21, it suddenly becomes obvious that the firm is burning through cash rather than generating it! In 2015, for every dollar of revenues the firm generated, it burnt through the equivalent of $1.79 worth of cash! The magnitude of these expenditures becomes evident in graphical format.
Figure 4. Source: Company Statements, Framework Investing Analysis
If you would like to look at the numbers yourself, here is the Form 10-K from which I pulled the data. Also, feel free to download a copy of the spreadsheet I used to make the calculations.
Cash Flow Calculations – Twitter 
I am happy to discuss this in our Office Hour sessions this week! Please feel free to ask me questions if you disagree with my method or don’t understand where the numbers are coming from.