Interested in stock investing? If you answered yes and were asked what factors you would examine while investing in stocks, the most typical responses would surely be financial performance, return and valuation ratios, among others. Price-to-earnings (PE) and price-to-book value (PB) ratios are two valuation factors that any investor may consider. While they both reflect current earning potential, neither of these valuation metrics indicates future prospects. And here is where 'free cash flow' is important! Free cash flow takes into account the company's earnings as well as historical (depreciation) and present capital expenditures, capital inflows and working capital investments.
The following story will help you in comprehending the concept of free cash flows, its method of calculation, the benefits it brings for the company, as well as why it is crucial for investors to take these into account. We will also focus on the top companies that have consistently generated free cash flow year-on-year, demonstrating excellent growth. Let's start by understanding the concept. The cash a company has, after taking into account the cash payouts required to run its operations and to sustain its capital assets, is known as free cash flow (FCF).
A portion of a company's cash flow can be withdrawn and given to creditors and investors without having an adverse effect on operations. The more the free cash flows, the better for the company. It represents the surplus cash that is readily available for value generation, expansion and rewarding stakeholders. The capability of a company to make a healthy profit serves as an asset for presenting an optimistic perspective to its stakeholders. And hence, while evaluating a business's sustainability and growth potential, analysts and stakeholders always assess the company's free cash flow position.
Calculating the Free Cash Flow
This story is from the July 17, 2023 edition of Dalal Street Investment Journal.
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This story is from the July 17, 2023 edition of Dalal Street Investment Journal.
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