What free cash flow (FCF) tells us that earnings don't?
Let us have a look at Company ABC.
From 1995 through 1997, the company posted $100,000, $5.9 million, and $12.3 million in earnings. Nice growth, right?
The company's FCF, by contrast, was negative $7.0 million, negative $28.0 million, and negative $57.4 million. FCFs also grew - but in the opposite direction as earnings.
That's not necessarily bad.
FCF is equal to the cash a company generates minus the amount it invests.
Company ABC is investing a lot, which is why its FCFs are negative.
How much is a lot (of capital expenditure)?
A quick way to tell how quickly a company tears through money is to compare its capital spending with its long-term assets (mostly, its plant and equipment).
While not perfect, the comparison at least gives us an idea of how aggressively a company is spending.
Company ABC's capital spending as a percentage of its long-term assets has been as high as 43%. That's a prolific spender.
At the opposite end of the spectrum would be company like Company XYZ, which cruises along spending an amount equal to about 5% of its long-term assets.
When you see a percentage as high as 30% or 40%, chances are you're dealing with a young company just getting on its feet.
Let us have a look at Company ABC.
From 1995 through 1997, the company posted $100,000, $5.9 million, and $12.3 million in earnings. Nice growth, right?
The company's FCF, by contrast, was negative $7.0 million, negative $28.0 million, and negative $57.4 million. FCFs also grew - but in the opposite direction as earnings.
That's not necessarily bad.
FCF is equal to the cash a company generates minus the amount it invests.
Company ABC is investing a lot, which is why its FCFs are negative.
How much is a lot (of capital expenditure)?
A quick way to tell how quickly a company tears through money is to compare its capital spending with its long-term assets (mostly, its plant and equipment).
While not perfect, the comparison at least gives us an idea of how aggressively a company is spending.
Company ABC's capital spending as a percentage of its long-term assets has been as high as 43%. That's a prolific spender.
At the opposite end of the spectrum would be company like Company XYZ, which cruises along spending an amount equal to about 5% of its long-term assets.
When you see a percentage as high as 30% or 40%, chances are you're dealing with a young company just getting on its feet.
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