Thursday, 15 December 2016

Free Cash Flow

While free cash flow doesn't receive as much publicity as earnings do, it is considered by some experts to be a better indicator of a company's bottom line. 

Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. 

Whereas earnings reports are subject to a number of different accounting tricks which can artificially boost the bottom line, free cash flow is not. 

It is quite possible, for example, for a company to have positive earnings and negative free cash flow. 

Negative free cash flow is not necessarily an indication of a bad company, however; many young companies tend to put a lot of their cash into investments, which diminishes their free cash flow. 

But if a company is spending so much cash, you should probably be investigating 

  • why it is doing so and 
  • what sort of returns it is earning on its investments.

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