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Laurence J. Peter

Investment Dictionary


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Free Cash Flow

 

Free cash flow of the company shows how much of cash business has earned in the reality over the period. There are many ways to determine the free cash flow of the company, and most often this indicator is provided in the annual report of the company but if it is not, then it can be found in company’s cash flow statement and is equal to operating cash flow less capex

 

It is hard to say which one is more important: ‘free cash flow’ or ‘operating cash flow’. The first one shows what amount of cash can be used to cover debt or to be paid out for shareholders. But ‘operating cash flow’ shows company’s ability to earn cash and that may be more crucial. As the main difference between these cash flows is capex, higher capex can allow expecting higher cash flow in the future.

 

When high cash flow stocks are acquired, an useful ratio might be ‘free cash flow yield’.

 






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