free cash flow


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Free Cash Flow

A measure of a company's ability to generate the cash flow necessary to maintain operations. There is more than one way to calculate free cash flow, but perhaps the simplest is to subtract a company's capital expenditures from its cash flow from operations. Some analysts believe that free cash flow is more important than other measures of financial health because it measures how much cash a company has and can make. This differs from other measures, which are sometimes accused of using both legitimate and illegitimate forms of accounting to make a company look healthier than it really is.

free cash flow

The cash flow that remains after taking into account all cash flows including fixed-asset acquisitions, asset sales, and working-capital expenditures. The definition of free cash flow varies depending on the purpose of the analysis for which it is being used.

Free cash flow.

A business's free cash flow statement may differ significantly from its cash flow statement. The cash flow statement generally represents earnings before interest, taxes, depreciation, and amortization (EBITDA).

Cash flow and EBITDA focus specifically on the profitability of the company's actual business operations, independent of outside factors such as debt and taxes. Free cash flow, however, reports the net movement of cash in and out of the company.

To determine free cash flow, equity analysts add up all the company's incoming cash and then subtract cash that the company is obligated to pay out, which includes all expenses, debt service, preferred dividends, and capital expenditures. The result tells you how much cash was left over or how short of cash the company was at the end of the fiscal period.

References in periodicals archive ?
Our analyses of 100-plus corporations indicate that an untapped 20 percent of market capitalization resides in the balance sheet, within those areas of operational excellence (such as inventory turns and Dso) that determine capital efficiency and free cash flows. A recent publication, "Cash Flow and Performance Measurement - Managing for Value," by the research affiliate of the Financial Executives Institute, indicates that a growing number of senior executives are beginning to understand that expectations about future cash flow drive stock valuation.
Table 1 Descriptive Statistics for 80 Mutual Life Insurers: 1985 through 1993 Standard Variable Mean Deviation Minimum Maximum Policyholder Dividends 112,440 367,030 0 2,453,00 Paid (in thousands) Free Cash Flow 2,275.20 8,899.90 -1.46 82,800 (in millions) Deviation in Free 571.87 2,674.10 0.032 42,350 Cash Flow (in millions) Volume of Insurance 25,547 99,298 0.014 1,964,000 in Force (in millions)
Standardizing the accounting for all of these items permits the free cash flow process to pursue its main objective: determining the condition of the enterprise after extraneous items, nonrepetitive items, and accounting variations are removed.
Adjusted EBITDA and Pro-forma Free Cash Flow should not be considered an alternative to, or more meaningful than, Net Income, royalty income, cash flow from operating activities or any other measure of financial performance presented in accordance with GAAP.
Free cash flow generation has further strengthened the balance sheet, reducing net debt to $959 million.
* Group free cash flow improvement of [pounds sterling]309m to [pounds sterling]568m driven by Core free cash flow of [pounds sterling]641 m (2017: [pounds sterling]318m).
Total free cash held by the industry firms in our research sank to the most recent low during the third quarter of 2017; but they reversed course and have since increased quarterly free cash flows, culminating in a multi-year high at the end of 2018.
Following this model, we can see that the ideal EV/Ebitda ratio of a stock goes up when its free cash flow increases as percentage of Ebitda or its cost of capital decreases.
According to the company, this improvement in free cash flow is primarily driven by a strong order intake.
Chief Financial Officer Stephen Daintith went further when asked by analysts and said that free cash flow could reach 1.2 billion pounds by 2020.
Many investors see free cash flow as a more meaningful metric.