See Also:
Cash Flow Projections
Discounted Cash Flow Analysis
Cash Cycle
Steps to Track Money In and Out of a Company
Free Cash Flow Analysis Definition
Free cash flow analysis is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period.
Calculation of Free Cash Flow
Free cash flow = Net cash flow from operating activities – capital expenditures – dividends
Or
= Net income + amortization + depreciation + deferred taxes – capital expenditures – dividends
Applications
Free cash flow is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.
Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.
Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.
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