Free cash flow is a crucial metric in financial analysis, measuring a company's ability to generate cash after covering operational expenses and capital investments. It provides insight into a company's true profitability and financial flexibility, helping investors assess its potential for growth and shareholder returns.
Understanding free cash flow is essential for evaluating a company's financial health and comparing firms across industries. It offers a clearer picture of cash-generating ability than net income alone, as it accounts for capital expenditures and working capital changes, making it harder to manipulate through accounting practices.
Definition of free cash flow
Represents the cash a company generates after accounting for cash outflows to support operations and maintain capital assets
Measures a company's ability to generate cash for shareholders, debt repayments, and potential growth opportunities
Serves as a key indicator of a company's financial health and flexibility in Financial Statement Analysis
Importance in financial analysis
Provides insight into a company's true profitability and cash-generating ability
Helps investors and analysts assess a company's financial strength and potential for future growth
Enables comparison of companies across different industries and accounting methods
Calculation methods
Operating cash flow approach
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Discounted cash flow - Praxis Framework View original
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The Basic Financial Statements – Financial Strategy for Public Managers View original
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Starts with operating cash flow from the statement of cash flows
Subtracts capital expenditures to arrive at free cash flow