Free Cash Flow (FCF)
Candlefocus EditorFree cash flow is calculated by taking a company’s net earnings and adjusting for any non-cash activities (such as depreciation and amortization) as well as changes in working capital and any capital expenditure. When adjusted for these kinds of expenses, FCF allows for a more accurate estimate of the actual amount of available cash in the company’s coffers.
As an indicator of financial health, free cash flow can act as an important forewarning device. When FCF begins to drop, it could signify an impending issue which will ultimately come to light sooner or later on the company’s income statement. A decrease in free cash flow could indicate a number of underlying issues such as a decrease in the sale of a company’s products, increased expenses, or an increase in capital expenditures.
Nonetheless, it is important to note that a high free cash flow does not always equate to a strong stock price – due to the presence of market sentiment and investor sentiment within the wider environment. Furthermore, a high FCF can signify a great financial health, however a company’s stock may still be subject to downwardly-trending price movements that are out of the company’s control.
In summary, understanding
the level of free cash flow can be an important measure of a company’s overall financial health. Since free cash flow is a gauge of the amount of money left over after obligations are fulfilled, management and investors can use this figure to analyze underlying issues that can otherwise remain hidden in the income statement. FCF is used as a forewarning device to determine whether any underlying financial health issues may be present in a company. However, it is important to remember that high levels of free cash flow does not guarantee a strong stock price.