Company ABC.
1995 Earnings $100,000 FCF -$7.0 million
1996 Earnings $5.9 million FCF -$28.0 million
1997 Earnings $12.3 million FCF -$57.4 million
Nice growth in earnings, right?
FCFs also grew - but in the opposite direction as earnings.
Company ABC's capital spending as a percentage of its long-term assets has been as high as 43%.
Company OPQ.
1997 Earnings $6,945 million FCF +$5,507 million
1998 Earnings $6,068 million FCF +$5,634 million
1999 Earnings $7.932 million FCF +$7,932 million
Nice growth in earnings, right?
FCFs also grew - but in this case, in tandem or the same direction as earnings.
Company OPQ has an annual capital spending of $3 billion or so, and its long-term assets are about $12 billion. That spending works out to 25% of its long-term assets, a pretty high figure.
Company DEF
1996 Earnings $1,473 million FCF - $2,532million
1997 Earnings $787 million FCF - $2,347 million
1998 Earnings $ 28 million FCF - $2,187 million
Company DEF's revenues actually declined during this period.
FCFs were consistently negative for the same period.
Company DEF spends an amount equal to about 20% of its long-term assets in a single year.
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How to use Free Cash Flow (FCF)?
Think of FCF as another bottom line.
Good and great companies generate lots of positive FCFs.
Negative FCF isn't necessarily bad, but it suggests you're dealing with either a speculative investment (such as Company ABC) or an underperformer (such as Company DEF).
Above all, negative FCF or a high level of capital spending naturally raises other questions.
If you are a careful investor, you'll want to know the answers to those questions before letting the company spend your money.
1995 Earnings $100,000 FCF -$7.0 million
1996 Earnings $5.9 million FCF -$28.0 million
1997 Earnings $12.3 million FCF -$57.4 million
Nice growth in earnings, right?
FCFs also grew - but in the opposite direction as earnings.
Company ABC's capital spending as a percentage of its long-term assets has been as high as 43%.
Company OPQ.
1997 Earnings $6,945 million FCF +$5,507 million
1998 Earnings $6,068 million FCF +$5,634 million
1999 Earnings $7.932 million FCF +$7,932 million
Nice growth in earnings, right?
FCFs also grew - but in this case, in tandem or the same direction as earnings.
Company OPQ has an annual capital spending of $3 billion or so, and its long-term assets are about $12 billion. That spending works out to 25% of its long-term assets, a pretty high figure.
Company DEF
1996 Earnings $1,473 million FCF - $2,532million
1997 Earnings $787 million FCF - $2,347 million
1998 Earnings $ 28 million FCF - $2,187 million
Company DEF's revenues actually declined during this period.
FCFs were consistently negative for the same period.
Company DEF spends an amount equal to about 20% of its long-term assets in a single year.
-----
How to use Free Cash Flow (FCF)?
Think of FCF as another bottom line.
Good and great companies generate lots of positive FCFs.
Negative FCF isn't necessarily bad, but it suggests you're dealing with either a speculative investment (such as Company ABC) or an underperformer (such as Company DEF).
Above all, negative FCF or a high level of capital spending naturally raises other questions.
- If the company is spending so much money, is it at least earning a high premium on that capital?
- And is all that spending paying off in rapid sales and profit growth?
If you are a careful investor, you'll want to know the answers to those questions before letting the company spend your money.
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