Showing posts with label free cash flow dividend cover.. Show all posts
Showing posts with label free cash flow dividend cover.. Show all posts

Friday 6 September 2019

Free Cash Flow


FREE CASH FLOW

An important factor in Shareholder Value Added analysis is the free cash flow (FCF) generating capability of a company.

This is the cash flow available after allowing for capital maintenance and interest payments.  FCF is calculated as:

Operating profit
Plus depreciation
Less cash tax paid
= Cash profits
Less investment in non-current assets and investment in working capital
= Free Cash Flow

FCF is useful in providing an indication of the level of a company’s cash flow generation.  

It also measures the amount of cash potentially available to cover the financing costs of the business after all necessary investment has been made.  Can the company safely consider raising more finance or making a major capital investment?

Companies often provide figures for their FCF, but there is no standard definition of the term so be cautious in using them.

If all interest payments are deducted, the resultant “levered free cash flow” indicates the amount of cash potentially available for dividends and future growth.

It is useful to compare the growth in free cash flow with that of earnings.  If the trends are significantly different, is it possible to find the reason?


Tuesday 25 July 2017

Checking the Safety of Dividend Payments using Free Cash Flow Dividend Cover

A quick way to check whether cash flow is sufficient to pay dividends is by using the free cash flow dividend cover ratio.

This is calculated as follows:

Free cash flow dividend cover 
=  free cash flow per share / dividend per share

If free cash flow is sufficient to pay dividends then the ratio will be more than 1.

It is a goo idea to compare free cash flow per share with dividends per share over a period of 10 years.



Interpreting free cash flow dividend cover

1.  A great business generates consistent and growing free cash flows.

2.  During a company's period of heavy investment, the free cash flow may not cover its dividend.

3.  Usually, this maybe for that period and its free cash flow will soon be more than sufficient to cover dividends.

4.  When free cash flow per share exceeds the dividend per share by a big margin, it can be a sign that the company may be capable of paying a much bigger dividend in the future.