Winning numbers can be embellished. This is hardly possible with cash inflow – this helps with stock selection.
When listed companies present their business figures, one number quickly comes to the fore: profits. This key figure says less about the financial strength of a company than one might initially think. For example, it cannot be read from it whether investments have been made or loans taken out. In recent years in particular, the increasing practice of emphasizing earnings figures that have been adjusted for various factors has increased the relevance of another metric: cash flow.
Operating cash flow is calculated by taking a company’s net income and adding back non-cash expenses, such as depreciation and amortization. Capital expenditures are the costs incurred by a company to acquire or maintain its fixed assets, such as property, plant, and equipment.
Once investors have calculated FCF, they can use it to compare different companies or to track a company’s FCF over time. FCF can also be used to calculate a company’s free cash flow yield, which is calculated by dividing FCF by the company’s market capitalization. The free cash flow yield is a measure of a company’s ability to generate cash flow relative to its size.
FCF is a valuable metric for investors because it can help them to assess a company’s financial health and its ability to generate profits. Investors should consider FCF when making investment decisions.