FREE CASH FLOW
Free cash flow fundamentally in business measures performance by considering the cash
available for distribution to the security holders and in settling the short term debts.
Essentially free cash flow is calculated as Operating cash flow plus depreciation/amortization
minus capital expenditure and increase in working capital. Free cash flow can also be defined
as the available cash for company expansion; the free cash flow is not easily manipulated by
accounting gimmicks such as accounting principles.
Free cash flow is calculated income statement information, cash flow and balance sheet
information. The free cash flow excel template allows the user to plug in revenues and
expenses to calculate earnings before interest and expenses, then taxes are entered in order to
arrive at operating profit and depreciation is then added back to give operating profit. The
information is easily picked from income statement.
The challenging part in determining the free cash flow can be in the calculation of the change
in working capital. The working capital is calculated as current assets minus liabilities, but
for the purpose of free cash flow, change in working capital is what is considered. To arrive
at change in working capital, the user of the free cash flow template has to calculate the
working capital for the year under consideration and for the previous year. The current year
on consideration working capital less the previous year working capital will give the change
in working capital. Some financial statement might give the change in working capital as an
addition in the financial statement notes. Capital expenditure is taken from cash flow
statements and it is the net change from investing activities.
A negative free cash flow does not necessary indicates the company has a negative financial
health; it is essentially good to dig for the reason behind the negative cash flow. Remember
free cash flow is the cash available for the business expansion and a company might have
heavily invested in expansion activities in the year.
The advice when looking at investment opportunities is to consider analyzing free cash flow.
The approach gives the investors the advantage of dissecting company finances beyond the
accounting devise; keep in mind accounting can be devised to manipulate earnings while it is