I know that you can normalize earnings by finding the average return on equity over the past n years. Can you do the same thing with operating cash flows? or better yet, FCFF or FCFE? For example: divide historical cash flows by equity (beg and end ave)? Would this work the same as earnings for a cyclical business?
The purpose of normalizing something is to get rid of the cyclical/seasonal elements of a business (think christmas trees or natural gas) whereas the purpose of FCFE and FCFF is more to analyze the effects of financial leverage (situational analysis? think debt prepayments, refinancing? etc.).
I am trying to find a normalized FCFE/FCFF to use in a discounted cash flow model. What other ways could I do this?
Ok, one way would be to build a model with all the operating assumptions (which you may normalize) and then carry it down to assumptions about future debt, prepayments, borrowings, etc.(which I guess you could normalize somehow) and you’re left with normalized FCFE/FCFF