Analysis Of The Security Investment Strategy Base On Free Cash Flow

Since the free cash flow has been proposed by Michael Jensen, scholars from various countries have conducted deep and extensive research. Free cash flow theory is used in various fields, so the applied research of free cash flow theory on investment in securities has important practical significance and reality significance. In 20th century 90s, Kennith Hankel and Yossi Lifant pointed out that free cash flow analysis is the most important analytical tools for portfolio, and investors’investment based on free cash flow can obtain excess returns. But their study is based on the securities investment market under U.S. accounting standards system, while China’s securities market has a special background, so it may not comply with China’s securities investment market conditions. Therefore, free cash flow is necessary to be studied in our securities market, and study the validity and applicability of the theory. This can provide a useful reference for our institutional investors and individual investors in securities analysis and portfolio investment.Based on free cash flow theory, to Chinese securities market as the research object, first of all, this paper discusses the company valuation method based on the free flow, and conducts a case study, using Wuliangye Co., Ltd. as an example.Then, through the valuation methods, this paper selectes the good company stock, constructes portfolio, and empirically analyzes the investment effect of the portfolio based on the free cash flow. Finally, through analysis and calculations of the company’s free cash flow, this paper constructes securities investment strategy based on free cash flow, empirically analyzes stock markets in China, and makes a significance test on the excess rate of return of holding the stock. This paper also conductes an overall significance test.Firstly, this paper introduces the theory of free cash flow, sorting out the related concepts of free cash flow theory, analyzes the definition of free cash flow and its methods of calculation and adjustments deeply, finally analyzes the practical significance of proposing free cash flow in our accounting practices and securities investment field. Secondly, combining corporation’s fundamentals, on the basis of financial statements’adjustment, according to basic financial data, in consideration to the influence of the business environment and the industry trend, this paper puts forward a free cash flow-based method to evaluate the value of the company through analysis and calculation of free cash flow. Then take the Wuliangye Co., Ltd as an analyzing object to study the case. The case studies show that the value of the company free cash flow method can effectively assess the value of Chinese listed companies’size and performance. This paper uses this method to screen out stocks that build the foundation for the portfolio and investment strategy.Thirdly,by introducing free cash flow Multiplier, free cash flow debt ratio, and integrating operating cash flow, market surplus ratio, market net ratio, low financial lever, the author constructed the securities portfolio investment of correlation index. The content validates that stock market have a effect on low market surplus ration, low market net ratio and low free cash flows multiplier. The yield ratio of portfolio investment can evidently improved by introducing free cash flows multiplier to compare with index.Finally, on the basis of financial statements’adjustment, starting from the basic financial data, through analysis and calculation of the company’s free cash flow, this paper proposes securities investment strategy which is on the basis of the amount of free cash flow, and dynamically empirically analyzes Chinese securities market. By constructing the selection criteria for investment strategy to select the listed companies with abundant free cash flow, calculating the portfolio results, this paper shows that in addition to 2006, the stock’s average return that we selected is slightly lower than the market’s average return, the average return is lareger than A-share market return in the remaining years. Then we do individual stock and overall significant test to know whether it has excess return. Through significant test of stock’s excess return, we find that in addition to 2006, average return of the shares we held is no significant differences with the A-share market returns, and in other years, average return is higher than the A-share market returns. That is to say, there is excess returns, and there is significant difference. Through doing the overall significance test of all the selected stock’s excess returns, the results show that the excess return of the selected stock by investment strategy are significant, that is, investment strategies of free cash flow have abnormal return and can gain better returns than the market return. This explains that investment strategy which based on stable free cash flow, low leverage and low free cash flow multiples and the reference of company value will gain higher return than the average market return. The results of the dynamic analysis show that the free cash flow of portfolio investment strategy is significantly higher than the market return. Therefore, this proves the investment strategy which is constructed based on free cash flow has good investment effects, and proves that the investment strategy based on free cash flow has superiority in terms of identify undervalued stocks.