FFO is Funds from Operations and AFFO stands for Adjusted Funds from Operations. These measures of fund flows are often used for REITs and Utility stocks like pipelines. These measures used to also be used for income trust companies, but these no longer exist. AFFO and FFO are generally used to gauge a company's profit.
A problem with AFFO is that it does not have a standard definition. Generally the FFO is adjusted for recurring capital expenditures to maintain the REITs or Utilities assets. The calculation of both FFO and AFFO has changed over time so it is not that easy to see the real growth in what companies can pay out. The calculation used to be called Distributable Cash. Then we had FFO and currently people are switching to using AFFO, but may also look at FFO too.
The main reason for the use of FFO and AFFO is to decide if a company has enough money on hand to pay for dividends or distributions. Generally speaking a distribution ratio of 75% to 95% is considered the best. For some companies it is useful to look at Price/FFO Ratio or Price/AFFO Ratio in place of Price/Earnings per Share Ratio (P/EPS) to determine if the current stock price is reasonable.
David Harper wrote a recent article on Investopedia about REIT investments and using FFO and AFFO. Michael Bowman in a 2013 article in the Globe & Mail talked about using AFFO to look at pricing Utilities and their payout.
On my other blog I wrote yesterday about EnerCare Inc. (TSX-ECI, OTC-CSUWF)... learn more. Tomorrow, I will write about BlackBerry Ltd. (TSX-BB, NASDAQ-BBRY)... learn more on Friday, August 19, 2016 around 5 pm.
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