Thread by @Sanjay__Bakshi

Completely agree. Would add a few points.
Negative operating free cash flow means the business consumed cash over the period of measurement. Which could be a few years.

https://twitter.com/rohitchauhan/status/1324091489497026561

But if the business had positive free cash flow in the past which was used for debt reduction or building treasury then those past actions will ensure that current needs for cash for growth capex will not require issuance of more equity shares.

Not that issuance of new shares to fund growth is always a bad idea. It isn’t. But when you have to issue new shares, you have to worry about valuation of those shares. If they are overvalued then issuance will not be dilutive towards existing shareholders. And vice versa.

So, there are wealth transfer effects when shares are issued at above or below fair value. It gets complicated because there is a zero sum gaming element here. The partners in the business are making money OFF each other and not WITH each other.

The best situation is often where negative operating free cash flow is funded from treasury alone. Because, then one does not have to depend on markets (equity or debt) at all. One is, truly the master of his fate and the capital of his soul (Invictus by William Earnest Henley).

The next best situation is to fund it from treasury (to run it down) AND modest amounts of debt if the business is such that it can support debt financing (not all can).

Of course, all this assumes that the capex is worth investing into in the first place. That is, prospective returns on incremental capital are very lucrative as compared to cost of borrowing.

To summarise: Generating negative operating cash flows, for a temporary period which could last a few years (because of growth capex which will create large earnings streams in the future) are a good idea as @rohitchauhan says.

But the opposite idea of delivering incremental earnings through growth capex while having positive operating cash flows is also a good idea. This happens in businesses which are not capital intensive.

And then, there are businesses which can deliver growth without requiring ANY incremental capital at all from lenders or shareholders. Those businesses deliver infinite returns on incremental capital.

In the above discussion, I did not mention valuation. When you bring valuation into the picture then the “best” situation (infinite returns on incremental capital) may not be the best investment. The best investment may well turn out to be the one @rohitchauhan wrote about.