Skip to main content

What is Free Cash Flow, How to anylaze free Cash Flow of a company ?

Free cash flow is one of the most important topics to evaluate a company, many of you are involved in the fundamental analysis of a company, then you must have heard of this word. However, those people who are unfamiliar with the term free cash flow, this is a mystery for them.

In this post, we will discuss a wide range of free cash flows and will try to know why it is important to evaluate when researching the company.

Let's try to understand this with the help of the following point. This post of mine is also important for those who want to learn to evaluate the stock.

1. What is Free Cash Flow (FCF) ?

Free cash flow is cash which is available to all the investors of the company. It represents the additional cash that a company is capable of generating the necessary funds for its operation or after expanding its asset base.

Here you need to understand that not all income is equal to cash. If a company is earning, it does not mean that it can spend all the income directly. The company can only spend free cash. There is a significant difference between 'cash' and that cash, which can be taken out of a business', or in accounting words: Cash from operating activities and free cash flow (FCF).

The cash received from operating activities is the amount of cash generated by the business operation of a company. However, all cash can not be excluded from the business because of operational activities, because the company is required to keep current. These expenses are called capital expenditure (CAPEX).

On the other hand, free cash flow is the cash that the company can generate after spending the necessary money to stay in the business. It is cash at the end of the year, after deduction of all operating expenses, expenditure, investment etc. and available to all stakeholders of any company (both stakeholders including equity and debt investor).

2. Why is free cash flow is important ?

It is important for investors to see the free cash flow of a company because it is relatively accurate method in finding its profitability compared to the company's earnings.

This is because the earnings reflect the current profitability of the company. On the other hand, free cash flow indicates the future development prospects of the company as it is a cash which allows the company to pursue the opportunities to increase the shareholder's value. Free cash flow shows the ease with which businesses can grow or pay dividends to the shareholder.

Extra cash can be used to expand its portfolio, developing new products, making useful acquisitions, paying dividends, reducing debt or pursuing any other 
development opportunity.

In addition, free cash flow is also used as input by calculating the value of a company using the popular valuation technique- Disconnected Cash Flow (DCF) model.

3. How to analyzed free cash flow of a company ?

When it is studying the company's free cash flow, it is important to find that where the cash is coming from. Cash can be generated either from earnings or debt. While increasing cash flow due to increase in earnings is a good sign. However, this is not the same with debt.

Apart from this, if two companies have only one free cash flow, it does not mean that they have the same probability of future. Some industries have capital expenditure more than other industries. In addition, if the CAPEX is high, then you need to check that the reason for high capital expenditure is due to expenditure or expenditure in development. To learn them, you have to carefully read the quarterly / annual reports of companies.

4. Negative cash flow ?

For investors, the continuous decreasing or negative free cash flow can be a warning signal. Negative free cash flow is dangerous because it can slow down business. In addition, if the company did not improve its free cash flow, then he may have to face insufficient liquidity to stay in business.

5. Conclusion.

In this post, we discussed the Free Cash Flow (FCF). This is a scale of financial performance of the company. The free cash flow indicates how much cash a company has left from its operations, i.e. the cash used to carry forward the opportunity to improve shareholder value.

That's all I hope for this post that it was helpful for you. Happy investment.

Labels

Labels:

Comments

  1. Simran Shah31 December 2018 at 01:36

    Really got a useful blog to which shows the proper market update. Its very informative, keep posting more like this.
    Intraday stock tips

    ReplyDelete
  2. Ashish Solankee1 January 2019 at 03:48

    Thanks, to get the latest updated post make sure you subscribe email newsletter.

    ReplyDelete

Post a Comment

Popular posts from this blog

How to Avoid bad decision mistakes in Investment.

H ere are some silly investment rules, even fools can follow them without making mistakes. These investment rules will be silly rules in the real sense. How many people will agree with the fact that investment can be done in a stupid manner. I think only some small minorities will accept this fact. The investment has been tagged in something that is complicated. But this trend is not right. Even  foolish people like me can invest money without any mistake, yes it is possible. Even the owner of the investment says that the rules of investment are simple. Knowing just a few tricks, someone can practice them efficiently. The advantage of knowing these rules is that they help in avoiding investing mistakes. Due to bad decisions, there are major losses happen in investment. These bad decisions are taken because there is a lack of knowledge. The objective of this article is not to give you an investment strategy, but give to develop the ability to make investment decisions wisely...
3 comments
Read more

How to decide where to Invest.

A sk anybody how they bought their first share, then you will always get a logical answer. Think that you are going to a party and there is food available in front of you on the table, which you have never tasted before or you do not know anything about it. What will you do?  Will you take a big spoon and fill all the food stuff in the mouth or take a small spoon and test it. The second approach seems more logical.  In the same way, if you do not have much knowledge of the stock market or are less then buying 10 shares is better than buying 100 shares directly for the first time. There are lots of advantages to making small investments. I mean to say that you are a new investor, so keep your initial investment low. I also started my initial investment from 2000 rupees because my purpose was to learn and not gain profit. Let's take a look at the worst scenario before we go to a good scenario. It is a very rare case that you lose the 100% amount of your initial inves...
41 comments
Read more

How to do direct Equity investment in Indian stock market.

I n the Indian stock market, a person can make direct equity investment which can be a rewarding investment for him, as well as the risk of loss in direct equity investment is very high. People who maintain a balance in risk and return dealing with in direct equity investment, they are the winners. But how risk and reward can be balanced, the risk associated with direct equity investment comes with the complexity of information. When buying a stock, the most important criteria for evaluating a company is Return On equity. How important is this parameter, a good investor does not invest without its help, millions of people in India invest in stocks, but only a few people know how to read the balance sheet. Apart from direct investment, mutual funds are such products that have been created for the common man. In direct equity, timing the market is very important, but timing market is not easy. The correct time of market is an essential trait that should be done while dealing with...
Post a Comment
Read more